Can I use shares as security for a home loan?
A share portfolio can boost your serviceability and help you give proof of genuine savings. But shares can't form part of your deposit (unless you sell them).
Key takeaways
- You can't use your share portfolio to form part of your deposit. But having shares can boost your borrowing power and improve your chances of getting a home loan approved.
- Dividends from shares may count as income, depending on the lender, even if the shares can't form part of your deposit.
- You could also sell some shares and use the money as a deposit. But you'll have to pay capital gains tax and forfeit future investment growth.
Share portfolios as a source of income
When assessing your ability to repay your home loan, lenders won't look at the total value of your share portfolio when assessing your serviceability. Rather, they'll look at the dividends you receive from your portfolio.
And because shares fluctuate in value, most lenders will only accept a percentage of your investment income.
Some banks will use around 80% of your dividend income when assessing your loan serviceability (your ability to repay a loan). Some banks or lenders apply 70% or even 50% instead.
Share portfolios as genuine savings
During the home loan application process, lenders will assess your income, debt and assets, and they will review how they affect your ability to service the loan.
One factor lenders look for is proof of genuine savings, such as regular deposits into a savings account.
Banks may accept shares as genuine savings too, provided you've held them for between 3 and 6 months, so holding a share portfolio in your name can help to increase your borrowing power.
Why won’t lenders accept shares as part of my deposit?
One thing a share portfolio can't do is serve as part of your deposit. The deposit for a home loan needs to be in cash, and the loan amount is secured against the value of the property.
This allows the lender to limit their exposure to risk. If you default on your loan repayments, the lender needs to recoup their money. The easiest way to do this is to force the sale of the property.
Your lender doesn't want to go after your share portfolio on top of this (especially if your investments have lost value).
Volatility is a big problem
The value of your share portfolio rises and falls all the time. So while your portfolio might be worth $50,000 now, in 12 months’ time the value could have dropped to $40,000 or even less, which would have a huge impact on the amount you borrow and your ability to service the loan.
How Australians invest their money
51% of Australians invest some of their money to get a return, whether that's through a high interest savings account, term deposit or the stock market. 12% own shares in companies, 8% invest in ETFs and 5% use managed funds. 8% invest in property.
Source:
Finder research
Selling shares to form your deposit
You can also sell some of your shares and use the cash to form your deposit. This is a simple solution, and can help you increase your deposit to 20%, letting you avoid paying lender’s mortgage insurance (LMI).
But there are some downsides to keep in mind:
- Genuine savings. Most lenders won't consider the cash from an investment as genuine savings unless it's been in your bank account for 3 months.
- Capital gains tax. When you sell an asset like property or shares, you pay capital gains tax on the profits. If you've held your shares for over 12 months there's a CGT discount.
- Loss of future growth. Shares are usually a long term investment. Selling your shares means you give up any potential future growth in those investments.
Frequently Asked Questions
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