Investing on casual contract
With new lending restrictions introduced so often, it can be daunting for some to gain an approval on their home loan. In this case study, the couple are looking to purchase a new rental property. Over the past few years, we have helped them build their net worth. Now the couple, with confidence, have decided to purchase a new rental property. However, their employment status has changed recently. In the past they were both on a full-time contract, now one of them is on a casual contract. It is a known fact that the banks are very strict on knowing how the clients will cover the repayment. This case study will highlight their financial position and how they could gain an approval from the bank under their current circumstances of being a casual worker.
Firstly, the couple are in their late 40s and have decided to retire early. Hence one works full time whilst the other works on a casual basis. They have an owner-occupied home and two rental properties under their Look Through Company (LTC). The couple have considered early retirement for some time and saw a beautiful property in Taupo. They decided to purchase it immediately. Usually this sort of quick purchase is not advisable, as you should first check with your financial adviser whether you can purchase such a property and/or analyse your own finances. However, the clients have learnt to keep a close eye on their finances and were very confident of their ability to purchase the new property. They also made sure to include a condition of finance in the Sale and Purchase Agreement. A condition of finance allows the client to agree to purchase a property only once if the financing is sorted. They will be given 10 working days to sort their finance. This is done when signing the Sale and Purchase Agreement. As a financial adviser, we will now analyse their finances and give them options on how to proceed.
As stated earlier, the clients have two rental properties and an owner-occupied property. All properties are collaterialised. At the time of this case study, the maximum lending on rental properties was 60% and owner-occupied properties was 80%. Their rental properties had a LVR of 52% combined and the owner-occupied property had a LVR of 33%. The purchase price of the Taupo property was around $600,000. This is where we need to discuss the options. Banks will not take kindly to casual workers for the simple reason, they are on a casual term. The bank wants to make a return on lending to the clients. This means the bank needs to be satisfied that the clients have a steady income and are not over spending to a point where they are unable to cover the repayments. On a casual contract the employee may have work one day and may not work for many days. This uncertainty results in an uneven income stream which, in the bank’s view, will make it difficult for one to manage a loan. So what are the options?
Option 1: The Taupo property becomes a rental property now and when the clients have decided to fully retire (5-10 years in future) it can become their new owner-occupied property and the existing house becomes a rental property. The rent received from the property is enough to cover the repayments and the clients at most could be paying $1,000 out of their pocket for the year.
Option 2: Sell one of the rental properties to accommodate the Taupo property. Based on a digital valuation one of the properties would earn well above the initial purchase price. The residual funds from the sale could then be used to purchase the Taupo property, which in turn will reduce the overall loan amount. The estimated lower loan amount and repayment was affordable by the clients with their current income. The bank will not consider the casual contract income as the full-time income and rent is enough to manage the repayments.
So, the main difference between the two options is that, the clients would lose a rental property.
In the grand scheme of property investment, it is crucial to hold and manage your property and only sell if you have no other option or the cost-benefit analysis of rebuilding the property is outweighed by selling the land. In this scenario, there is no need for the clients to sell their property as their net worth would be negatively affected. The clients understood and wanted to take Option 1. Under dire circumstance, if it was not possible then they were ready to take Option 2.
It was at this point we went through the payslips of the casual contract client and heard their story. The client is a skilled worker, truck driver, who can earn more as a causal worker compared to full-time worker. In New Zealand, skilled workers are always in demand, especially truck drivers. The client also explained how they were overworked whilst working full time and how they are now offered more work as a causal worker but on their terms. This was a far better plan for someone who
plans to retire in the upcoming future. The payslips showed how they had worked on average around 40 hours per week for the past 8 months. This information was key to securing the loan. When we presented the application, we disclosed this information and convinced the bank they can purchase the Taupo property as a rental until they have decided to retire. The next day the bank makes a call to confirm the information. It didn’t take long for the bank to accept the application as is.
To summarise, it is possible to gain an approval from the bank when you are on a casual contract. The chances will increase based on the strength of your financial position. The couple in this case study had a strong position and only one person was on a casual contract. It is important to note that the approval was only given after it was confirmed they had worked around 40 hours per week for a long duration whilst on the casual contract.
The highlight of this case study is to always have confidence in your financial position, the stronger you are the more likely you will get an approval for multiple investments.