Buying a Home that is Subject to a Lease

  • 20 August, 2019
  • Sharon Piening

I was recently involved with arranging finance for a client who was buying a home that is “subject to lease”.

That is; the property had tenants and the lease still had some 6 months to run.

Subject to Lease – The Ground Rules Change

Unfortunately, when a home is “subject to lease”, it can affect the way it is assessed by Lenders.

Rather than being assessed as an “owner occupied”, the application is likely to be assessed as an investment (especially if Lenders Mortgage Insurance is required) – which are subject to different ground rules!

Buying a Home that is Subject to a Lease - What Changes?

If you purchase a home that is subject to lease – you may need to:

  • Contribute more equity (in the recent case the client had to contribute an additional 5% equity)
  • Pay a higher “Investment Loan” interest rate (Investment Loan Principal and Interest rates are generally 0.20% to 0.50% above Home Loan rates)
  • Pay a higher Loan Mortgage Insurance Premium (If that is required)

Serviceability is also assessed differently

In addition to the above, if you are buying a home that is subject to a lease, Lenders may also choose to assess serviceability based on the property continuing as a rental.

In practical terms this means:

  • A higher assessment rate is used (To test affordability, Lenders load interest rates to ensure the debt can be serviced should rates rise in the future. In the case of an Investment Property, the rates offered are also higher than a normal Home Loan)
  • The rental being included as income – a number of Banks now also discount the rental by a further 20%
  • Including costs associated with a rental (maintenance, agents fees, insurance, repairs etc) as an expense

In addition to the foregoing, if the applicant is living at home say with his or her parents, some Banks will include a notional “rent” of $650.00 per month – regardless of whether it is being paid or not.

On the upside, if:

  • The equity held is more than 20%
  • The loan is not subject to Mortgage Insurance
  • The lease is short-term
  • Serviceability is strong

some Lenders will simply assess the application as a normal home loan rather than investment finance.

Forward Planning – Avoiding Disappointment and Delays!

As can be seen from the foregoing, navigating the home loan finance maze today is far from straight forward. Particularly if you are buying a home that is subject to a lease.

Lender appetite, policies and approach change on a regular basis.

While at times it can be complex and frustrating, the key to a successful outcome is understanding all the options available and critically, forward planning!

With this in mind, if you are thinking about finance, call me on 0421 304 990 – and I will help you get – “Home Loan ready”!