I'm confused - meaning of income for lo doc loans

[GoAnna!]

Yes NO Doc. I Believe they asset lend up to 90% so the MB tells me.

I gave them a call today. It reminded me what is great for one person is not for another. They were soooo not interested due to the nature of my title. Message was basically that they couldn't be bothered. I then called the CBA (thanks for referral - you know who you are!) and they sound quite keen. Which is funny because you would think they would be on Mortgage Street's panel of lenders.

 

[Land]

Just tp clarify

So, just to clarify - there is no problem using your projected capital gain as part of your income on a low-doc loan?

i.e If my portfolio was $3M, and grew at an average of 10% p/a, I could say that my income was $300,000 p/a?

 

[Nth Brisbanite]

So, just to clarify - there is no problem using your projected capital gain as part of your income on a low-doc loan?

i.e If my portfolio was $3M, and grew at an average of 10% p/a, I could say that my income was $300,000 p/a?

Great question! I thought that lo docs had to do with capacity to pay back loans. If your portfolio grew by $300,000 and you were able to access this amount through an increased line of credit, I would say it should count as income.

 

[Finance guru]

Wow! 5 pages in to this thread! We're certainly inciting a lot of debate on this aren't we?

As has been said before (as most everything has by this stage)
Each of the lenders have a different interpretation of what income for a lo doc loan is.
For some lenders Lo doc is only for self employed people who run a business, and haven't done their tax returns for a bit (altho obviously said ppl should be wary of an incipient tax audit!)
For some lenders they have a 'broader' interpretation of what your declared income can consist of. And this is where you can find latitude in what you declare.

If you're a PAYG earner on say $50K, buying your first investment property then where could you find the income from to declare much more than $50K on your lo doc declaration?

If, on the other hand, you're a PAYG earner on say $50K with a profitable property portfolio of maybe $3M, who is using capital gains in the portfolio to fund repayments and further purchases, I think it reasonable to include an estimation of capital gain in your income. At a very modest estimate of 5%pa your income from capital gain from a $3M portfolio would be $150,000.

And, if 75% of your income comes from your property portfolio and a measly 25% from your PAYG income then I don't think it's at all unreasonable to declare yourself to be a self employed investor.

And for those who like numbers as much as I do, you can be precise about your estimated capital gain. Australian Property Investor Magazine in March 2008 (www.apimagazine.com.au ) gave a listing, per suburb for the average capital gain per annum over the last 10 years, for every suburb in Australia.

As with so many things. this is a shades of grey question. The pertient things to remember are
- Check your lenders opinions of what lo doc income can consist of.
- Do you feel that the income you're declaring is reasonable and able to be justified (if checked by either the lender or the tax office)
- Are you comfortable with the income you're declaring
- And while I'm all for trusting your MB, be aware of, and ensure you agree with any income figure they declare on your behalf.

And, if all of the above are met... then go forth and declare!

 

[josko]

Wow! 5 pages in to this thread! We're certainly inciting a lot of debate on this aren't we?

As has been said before (as most everything has by this stage)
Each of the lenders have a different interpretation of what income for a lo doc loan is.
For some lenders Lo doc is only for self employed people who run a business, and haven't done their tax returns for a bit (altho obviously said ppl should be wary of an incipient tax audit!)
For some lenders they have a 'broader' interpretation of what your declared income can consist of. And this is where you can find latitude in what you declare.

If you're a PAYG earner on say $50K, buying your first investment property then where could you find the income from to declare much more than $50K on your lo doc declaration?

If, on the other hand, you're a PAYG earner on say $50K with a profitable property portfolio of maybe $3M, who is using capital gains in the portfolio to fund repayments and further purchases, I think it reasonable to include an estimation of capital gain in your income. At a very modest estimate of 5%pa your income from capital gain from a $3M portfolio would be $150,000.

And, if 75% of your income comes from your property portfolio and a measly 25% from your PAYG income then I don't think it's at all unreasonable to declare yourself to be a self employed investor.
And for those who like numbers as much as I do, you can be precise about your estimated capital gain. Australian Property Investor Magazine in March 2008 (www.apimagazine.com.au ) gave a listing, per suburb for the average capital gain per annum over the last 10 years, for every suburb in Australia.

As with so many things. this is a shades of grey question. The pertient things to remember are
- Check your lenders opinions of what lo doc income can consist of.
- Do you feel that the income you're declaring is reasonable and able to be justified (if checked by either the lender or the tax office)
- Are you comfortable with the income you're declaring
- And while I'm all for trusting your MB, be aware of, and ensure you agree with any income figure they declare on your behalf.

And, if all of the above are met... then go forth and declare!

H Jenelle,

Have you actually done this on a Lo Doc application- declared the borrowers occupation as a SE Investor?

I also have read recently that the ATO is looking closely at the inconsistancey with high incomes delared on Lo Docs and little or no tax paid, and charging tax for the difference.

I do question how they get their hands on our Lo Doc Applications?

I have used Capital Gain recently on my Lo Docs but after reading about the ATO reference to Lo Docs, am having second thoughts about it next time. I think now a No Doc may be my next option. Thoughts/

regards Jo

 

[yieldmatters]

So, just to clarify - there is no problem using your projected capital gain as part of your income on a low-doc loan?

i.e If my portfolio was $3M, and grew at an average of 10% p/a, I could say that my income was $300,000 p/a?

If a bank allows somebody to do this then they are completely insane. Let me know if you hear of a bank that allows people to include capital gain as income so I can short their shares in a big way.

 

[Ausprop]

If a bank allows somebody to do this then they are completely insane. Let me know if you hear of a bank that allows people to include capital gain as income so I can short their shares in a big way.

well they will recognise it if you liquidate it and is there really any difference, other than with one you have paid tax and the other you are still exposed?

 

[Rixter]

well they will recognise it if you liquidate it and is there really any difference, other than with one you have paid tax and the other you are still exposed?

Great call Aussie! In fact by liquidating they are really worse off.

 

[Finance guru]

So I want to pose a question for those people who are concerned about declaring anything beyond their PAYG income as income.
How do you propose to grow your portfolio past the limits of your PAYG income? And how do you imagine people who have done it have been doing it?

Let's do a general example.
If you have a property portfolio of $3M with an overall LVR of 80%. Let's assume that your interest rate is 9%. That would be total interest only payments of $216,000 pa.
If you received rental income on every single property at 3.5% your rental income would be $105,000pa. If we estimate a generous 25% for maintenance costs, your rental return becomes $74,750pa.

This means that to keep a property portfolio of this size you would need to be putting in $141,250pa out of your own pocket.

Now, while I'm sure that there are some lucky people out there who can can comfortably afford to pay this out of their PAYG income, but for the average family, on $50K a year that is absolutely not possible. So there must be an alternative, otherwise very very few people would have a property portfolio.

So there must be an alternative.

And if you can find a different one than what's already been mentioned, do let us know!

 

[josko]

Quote:

Many are funding repayments from legitimate sources like inheritances and capital gains, often derived from investments in property.

Go Anna:

Well the ATO has no issues with LOC

Thanks Nth Brisbanite,

Thanks to all who contributed, great thread.

After re-reading this thread through again, I am now happy to keep applying Capital Gains as part of my income on my Lo Doc.

regards jo

 

[Token Funder]

Quote:


Go Anna:

Thanks Nth Brisbanite,

Thanks to all who contributed, great thread.

After re-reading this thread through again, I am now happy to keep applying Capital Gains as part of my income on my Lo Doc.

regards jo

If you needed to think about it that hard, it's not income.

TF

 

[Buzz]

Finance Guru you said" This means that to keep a property portfolio of this size you would need to be putting in $141,250pa out of your own pocket.

Now, while I'm sure that there are some lucky people out there who can can comfortably afford to pay this out of their PAYG income, but for the average family, on $50K a year that is absolutely not possible. So there must be an alternative, otherwise very very few people would have a property portfolio.

So there must be an alternative.

And if you can find a different one than what's already been mentioned, do let us know!"

For the scenario described above I don't think the question should be find an alternative to interprutations on declaration of income, rather it should be can the client afford this strategy?

If someone earned $50k a year and had a differential on the their portfolio of $140k and based on previous comments they had a $3mill portfolio growing at 5% ie $150k a year to fund the differential they would be refinancing every year to cover costs. Hopefully, fingers crossed, that the growth is better than 5% more often than not so they can build up a reserve. After a while they may need to go to no doc lending which as we know this week has seen significant policy changes to the majority of lenders who have reduced LVR's to 65% with - no cash out - which would prevent them from continuing to borrow to pay the differential.

Regardless of what they are happy to declare they need to be able to be confident that this strategy works in the long term or in the time frame that they are working with and for those times it does not the least of their worries hopefully is that they are eating mince again for dinner not going bankrupt.

Just my thoughts

Jane

(Finance guru I am using your quote to demonstrate a point that I think this thread should include. I realise you would always consider affordability in any recommendation)