What rental income percentage is taken into account when lenders work out lending potential?

Lucy EldredDecember 17, 2020

When lenders work out your borrowing capacity for an investment property, they take into account rental income and your claimable expenses to see your capacity to repay the debt.

Rental income is considered income much in the same way as your salary.

However, lenders do not take 100% of the gross rental income expected into account. While it varies from lender to lender, the general rule is that 80% of rent will be calculated into the equation. Some take as low as 70% into account. This is largely due to letting periods, associated costs such as repairs and any vacancies that may occur.

While it’s less common, some lenders are known to consider rental yields instead. Another point worth remembering is that some banks, will allow you to live in the house with the intention of leasing out individual rooms, and may take this income into account.

Some banks have been known to consider up to 100% of the rental income, however there are usually a number of other hoops to jump through to achieve this, such as an 80% or lower Loan to Value Ratio (LVR) and a maximum amount of total loans with that lender.

If you become “rent reliant” – where a certain portion of your income is made up by rent – then you may start to see yourself declined by some lenders.

Banks usually use rental income confirmed through a valuation. It can assist to provide a managing agent’s rent assessment on the property with your loan application.

For help getting started in property investment, speak with a RAMS home loan specialist and pick up your free RAMS Investor Pack.

Follow RAMS on Facebook, Twitter and LinkedIn

Disclaimer: Information in this material in general and does not take into account your objectives, financial situation or needs and you should consider whether it is appropriate for you. You should also obtain independent professional advice relevant to your financial circumstances.

The taxation positions described are general statements and should only be used as a guide. It does not constitute tax advice and is based on current tax laws and their interpretation.

RAMS Financial Group Pty Limited does not endorse or assume any responsibility for the advice, content or services provided by Property Observer or any other third party referred to in this material.

RAMS Financial Group Pty Limited ABN 30 105 207 538 AR 405465 Australian credit licence 388065. Credit provider and issuer of RAMS deposit products: Westpac Banking Corporation ABN 33 007 457 141 AFSL and Australian credit licence 233714.

Editor's Picks