Do banks consider your shares when you apply for a home loan?
Your investment portfolio can actually boost your borrowing power and impress a lender, however there are some caveats to be aware of when using your shares to strengthen your application.
When applying for a home loan, lenders will assess the risk of lending you money by looking at your:
- Income
- Debt
- Assets.
Lenders want to asses your finances in order work out if you can afford the loan repayments.
What do lenders look for when applying for a loan?
Aside from your debt-to-income ratio, what lenders really want to see is proof of genuine savings, a proven track-record of debt repayment, among other things that give you more borrowing power.
The income you get from your shares (in the form of dividends) may actually be considered proof of genuine savings too, provided that you’ve held them for at least three months.
However, as the value of your shares can fluctuate, most lenders only view up to 80% of your investment income as part of your overall savings.
In essence, they’re not really looking at the total value of your portfolio. Rather, the dividends paid out to you.
Can I use my shares for a home loan deposit?
Unfortunately you can’t use your share portfolio as part of your deposit. You’ll have to save for a deposit through other means.
That’s because the value of your shares can change, and it isn’t as readily accessible as cash or property that you‘ve put up as equity.
If you default on your loan repayments, then the lender will try to recoup their losses as soon as possible.
If the bank has to sell your shares, then there’s a chance that they’ll be worth less than their value when you originally applied for the loan, which could mean the bank loses money.
The way around this is to sell your shares and use the returns as part of your deposit.
While this might not be the ideal move for you, it could help you raise enough for a 20% deposit, removing the need for you to take out Lender’s Mortgage Insurance (LMI). That’ll mean you’re up for less money in the long term.
If you’re considering buying a property, make sure you understand the home loan process, including what information and evidence you’ll need to have ready. After that, compare home loans with Mozo below, or browse through some of the best home loans in Australia for award-winning products featured in the 2023 Mozo Experts Choice Awards.
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