When you apply for a loan, many banks take into account the total amount of all your shared debts, not just your share, including for joint mortgages or living expenses. Your borrowing limit may be lowered as a result, even if you are responsible for fulfilling just part of these responsibilities.
To make things more fair, some Australian banks use a policy called the common debt reducer. Under this policy, banks assess only your share of joint debts, such as a co-owned property loan, rather than the total amount. It can lead to a more accurate and fair assessment of how much you can borrow.
Curious about how the common debt reducer works and how it could improve your chances of getting a home loan? Keep reading to learn more.
How Do Banks Determine Borrowing Power?
When banks calculate your borrowing power, also known as ‘serviceability’, they follow a strict set of guidelines that may not always align with common sense.
For instance, if you’re purchasing a property with your spouse or de facto partner, it’s logical for lenders to assess your combined living expenses and debts as a household. However, banks often apply the same approach to co-borrowers, such as friends or relatives, who are buying an investment property together.
This means they assess each co-borrower as though they are fully responsible for the entire debt and living expenses, regardless of individual contributions. This approach can limit borrowing power for future investments, even if you are responsible for only a portion of the total financial responsibility.
Eligibility Requirements For A Common Debt Reducer
Each lender is different!
- Some lenders may restrict lending to less than 80% of the property value while others will lend up to 95%.
- Some will ignore all liabilities of the non-borrower but will still factor in living expenses but particularly if you have dependents.
- Some lenders will not apply a common debt reducer for owner occupied properties meaning it only works when buying an investment property.
There are only a few specialist lenders that offer common debt reducer home loans.
Getting a great interest rate let alone getting approved comes down to presenting a strong case backed up with good evidence.
We can help you get approved!
Call us on 1300 889 743 or complete our free assessment form to speak with one of our specialist mortgage brokers.
Why are most banks conservative?
Banks are always risk-averse and always look at applications in terms of “worst case scenario”.
The bank wants to know that you can afford both your and your partner’s current debt and liabilities should they be unable to produce an income.
That could be anything from job loss, injury or even death.
That’s why being assessed at 100% of large debts like a mortgage can stop your investment plans in their tracks.
This is the same reason that most banks only consider 80% of your rental income.
They see this as a sufficient buffer in case of market fluctuations that can cause high vacancy rates, tenants that don’t pay their rent on time and in the event that you had to sell your investment property.
Tips for improving borrowing power
To give yourself the best chance of getting approved:
- Cut out any unnecessary living expenses.
- Pay down any existing debts as much as you can.
- Close any unnecessary credit facilities, or at least reduce the limit.
Next, ask your non-borrowing partner to do the same.
In this way, you give yourself a better chance of maximising your borrowing capacity should you not be able to qualify for a common debt reducer solution.
Who Is A Common Debt Reducer For?
- Co-owners of property: Friends or relatives who have purchased property together and need a fair assessment for future loans.
- Couples with joint liabilities: Spouses or de facto partners applying for loans while sharing existing financial commitments.
- Investors with shared debts: Those co-investing in properties or assets who plan to expand their portfolio.
- Borrowers sharing financial responsibilities: Anyone sharing liabilities like mortgages or loans and seeking an accurate reflection of their personal liability.
Will I have to pay a higher interest rate?
Some lenders that offer common debt reducer home loans are classed as specialist or non-conforming lenders.
These types of lenders are unregulated and approve risky home loan applications. Because of this, they will attach a risk fee to their interest rates.
So you could potentially be paying upwards of 2-3 percentage points on your interest rate.
However, there are some major banks and lenders that can help which means you can get the same interest rate as if you were a standard borrower!
How does common debt affect my investment plan?
When building your real estate portfolio, having a good mortgage strategy is just as important as having a good property investment strategy.
As we’ve mentioned above, having a current mortgage with someone else can seriously affect your borrowing power if you decide to buy real estate on your own.
Because there are less than a handful lenders that offer a common debt reducer as a solution, that means there is less opportunity to shop around and get a great interest rate.
It also means you won’t be able to spread your risk across multiple lenders so you avoid exceeding mortgage exposure limits.
Want to keep building your investment portfolio?
Call us on 1300 889 743 or complete our free assessment form to discuss your situation with one of our specialist mortgage brokers.
We can tell you if you qualify for a common debt reducer home loan and also help you build a good mortgage strategy for your investment portfolio.