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Why Tal is not your pal – when it comes to home loans for Police Officers

Why Tal is not your pal – when it comes to home loans for Police Officers

Please read before you exit

It is real money, but in terms of using it for a home loan, income protection payments from TAL are funny money. You may think that you are exiting with a set percentage of your income but in reality, that is not the case. In terms of calculating your income for the purpose of a home loan, these TAL payments may as well be zero.

Why? Well, it is easy enough to put in words. When it comes to borrowing money, banks ( and when I say banks I mean all lenders ) look at your actual household income and then look at usable household income. Bank rules mean that only certain types of income can be used to assess your ability to get a home loan. 

Income from a Job is Standard Income

Income from a job is almost always usable. Most people have a good understanding of this. Banks look at risk and each bank would like to see you in a job for at least a certain amount of time. Most banks like to see 12 months continuous employment but there is a variance all the way down to one day. Some banks would consider a brand new job as long as you are not on probation, even if you have been in that role for a week or so. This income from a job is standard income. Most of it ( the goal is to get to a true 100% ) can be used in your home loan application.

TAL Payments are not “Income”

I could not tell you how many letters I have read from insurance companies. It is a lot. Ask a question and ask for the answer to be put in writing and you will get what I like to call “form letter lucky dip.” Here is why I call it that.

Every question you ask an insurance company is answered off a script. The answers are ambiguous and confusing. Is the sky blue? Ask an insurance company and the answer would come in a letter that says, “On a certain number of days the sky approaches a colour that could be considered blue, however, there are certain difficulties defining the colour blue, therefore the colour of the sky can not be quantified.” It would not be that bad but it would be something like that. 

In this case, the Script is not the issue

The real issue is the payment itself. It is an issue with the deal as it was struck and the payment as it is paid. In order to be considered income a payment needs to be, “Permanent and Ongoing”.  Remember that phrase.

Ask a broker or banker, who does not deal with many police, if you can use TAL payments and they will answer, “Sure, all we need is a letter from the insurance company that the payments are permanent and ongoing.”

Right now the issue is crystal clear. You will get a letter from TAL but it will clearly define that your payments “end” on a date. At that point, you are of no interest to a bank. The income, no matter how much it is, can not be used. It is not income, it is a payment. The payment can not be used to determine your ability to pay for a home loan because it does not continue until the end of the loan term. 

You are probably permanently locked out of the home loan market forever or until you get a standard job that the banks recognise. 

What if I just want to refinance what I have

Same answer. Even if you have never missed a payment and have been on TAL that whole time you cannot refinance using TAL payments. It is just not income in the bank’s eyes.

Ok, so there must be exceptions

Well, sort of but not really. There is a funny phrase in banking that goes something like this. “Yes, you can use that income as long as we don’t need it.” It is a confusing phrase but explains a lot about the lending landscape and the thought process of decision-makers.

What will usually happen is that the letter from TAL says that you will receive a payment for say 7 years after which time you fall into the WorkCover system and receive a payment from them.

We are then in the realm of serious, “form letter luck dip”. Your letter from EML will never ever say that your payment is permanent and ongoing. I have seen over a few dozen of these letters. They are all very very similar and equally unhelpful. They will say that the payment lasts until retirement age but the letter will have several qualifiers. These qualifiers give the bank decision-maker no choice but to exclude the income.

The state of play for EML Payments and TAL payments for police.

In summary:

  1. The TAL payment cannot be used. 
  2. The lower EML portion of the payment “may” be used if we can prove that the payment is permanent and ongoing. This will be done through the hard work of your broker. We have not seen a letter from EML yet in the dozen or so applications of this type that meets any banks guidelines.
  3. In the defence of banks – how could they use the payment when they know it ends

What are the Traps

We have one lender that states that if the income is permanent and ongoing for 5 years we can use the payment. This may seem like an answer. However, It is not because the letter we use to support and prove the TAL income will say that it lasts longer than 5 years but it “ends”. 

The “greater than five-year” rule is nullified by the general rule that we need to show how you will be able to pay off your loan “after” this payment ends. 

If it where income from a job we could simply say that you would continue to have that job. What can’t be done is say that in 7 years time you will get another job and you will earn greater than the payment.

So the bank with this greater than five-year rule does not help either.

So at the end of the day money from TAL is not income. Money from EML might be income if you can show that it is permanent.

What are the issues with this

The issue is that payment from EML is circa $500 a week. No person can qualify for a loan on that amount of income. 

Wins, yes there is some good news.

If you are part of a joint application that relies very heavily on the income of the other applicant the payments can be considered more easily. Again, forget about using any of the TAL amounts. Only the lower EML portion is considered.

The lenders that let you do this, however, will call you “Near Prime” and charge you an interest rate as high as someone who is a former bankrupt. I have written to this lender about the ethics of this and we are waiting to hear back from them. That is if the rate the customer pays is determined by risk, why are you charging people with a permanent ongoing payment the same rate as former bankrupts or businesses that have been open less than one year. 

Main Stream Solutions

Most mainstream lenders just say no. Where the loan to valuation ratio is less than 80% some major banks will let you use the EML portion of the payment. This is on a discretionary basis and only for very low-risk loans. The TAL payment is simply not income when it comes to home loans. 

  • If you are a single applicant and you are on a TAL/EML payment you will most likely be ineligible for a home loan
  • If you are part of a joint application you may be able to qualify for a loan

Issues that we will discuss in upcoming articles – mitigating circumstances

  • Using part eml income with part-time employment income
  • Using part eml income with self-employment income
  • Loans for new businesses
  • What is “common debt reducer” and  how can it help

Aware of anything that will adversely affect

When you speak to your bank you will need to declare anything that will adversely affect your ability to repay a home loan. If you are aware that you will be transitioning from full-time police income to another form of income you would need to address this.

Solutions

The issue of payments for police injured in the line of duty is extremely complex. If you have been injured you have no choice but to accept things and move on.  In general, the community believes that injured police get pensions. The closest thing to this was the pre 88 until death payments. The unfortunate thing is that there is no adequate support and change if any will be slow. This means that as an injured cop the only thing you can do is work with the system as it exists. You need to know that going forward getting a home loan is not impossible but in my own words it is, “bloody hard to do”.

At a minimum, the police page about income protection should be updated to let police officers know that the payments are not income for the purposes of a home loan. https://www.police.nsw.gov.au/about_us/career_transition/managing_finances/income_protection_fact_sheet_2

Conclusion – All you can do

You have a very dangerous job. Nothing will change that. However, you do need to know that if you get injured and can’t continue working you will probably be locked out of homeownership permanently ( given the reality of the payments and house prices ) and if you have a home loan already you may never be able to refinance it. 

If you raise that issue with your association rep and they give you any information to the contrary ask them to call me. I have put my heart and soul into getting banks to understand the system as it is. Out of a 40 bank panel, the factual answer is “No”. Tal payments are not and could never be considered income for the purposes of a standard term home loan. Police need to at least know the truth of the situation.

There are a few things you can do: 

  • Understand that TAL payments are not income in the eyes of a bank
  • Establish a relationship with a broker that you trust
  • Consider other additional insurance over and above PBRI 
  • Do an annual review of your home loans to make sure you have the best option already if the worst happens

Every situation is different. If you want to have a quick chat about yours feel free to reach out. 

100% overtime for police. Can police officers really use 100% of overtime?

100% overtime for police. Can police officers really use 100% of overtime?

At the drop of a hat and on the fly I can explain any and every aspect of police income structure to a bank credit officer. I am Australia’s leading expert on this. This can often mean the difference between a yes or no from the lender. Every bank has different rules with various degrees of discretion around interpretation. 

There are 30 banks on our lending panel. Thinking of an analogy perhaps it would be a little like learning a Crimes Act for 30 states. There is a lot of duplication but knowing the differences is what makes the difference. At the end of the day, you want someone who can do what they say and get the job done. There are a few web pages around that say they “understand” but scratch the surface and you will see they have just cut and paste content from bank credit policy into marketing. I have been to the same seminars and listened to banks say they are using 100% of police overtime income. Most acknowledge that they aren’t “really” using it all and put failsafes into their algorithms to avoid overcalculation. 

This makes sense as banks can’t be expected to train lending officers to that expert level on a particular topic. Honestly, some banks just say no. We don’t use those ones. Some banks have a great policy to start with and we work with those lenders to show them how to best and most fairly interpret what is already fair. This still makes a difference. Others are in the maybe category and this is where we have to do the most work. 

These “maybe” banks make case by case decisions about customer files. It can be a bit like landing at court. With the same set of facts, interpreting the same rules can equal a different result. If everything else about your circumstance means the best fit for you ( or possibly one of only a few options ) is a bank that falls in the maybe category having a positive outcome is huge. This is why you need an advocate that understands.  

So, it might sound a little like I am one of those people that thinks they know everything. This is not true but I do know my strengths and weaknesses. I will give you an example. I don’t know much about loans for dentists. If a dentist walked through the door I am sure I could get the job done and do it to a very good standard. However, there is a guy who is without a doubt the best guy to talk to if you are a dentist that needs a home loan. He is hands down the expert in that area. The best thing to do would be to put the dentist in touch with the guy who is the best broker for dentists. 

I guess what I am saying is I am that guy for NSW police officers. To achieve 100% police overtime use you really need to be an expert. If you are a NSW police officer and you need a home loan then call me because I am that guy. I know what I know and understand that you can’t be an expert in everything.  It is not something I set out to become an expert in. It just happened.

How novated leases affect police officers ability to get a home loan

How novated leases affect police officers ability to get a home loan

Love them or hate them there is no doubt that the novated lease is a popular “product” when it comes to police officers.  In its simplest form, the novated lease packages the cost of a motor vehicle into a single payment that accounts for the real financial cost of the vehicle as well as the vehicles full running cost. That payment is paid in part from pre-tax income and in part from post-tax income.

The attraction for the product is in part the simplicity of having all the costs effectively pre-paid and in part the tax advantage. Today I would like to talk about how the lease affects officers seeking a home loan but I will share a few brief comment on the product in general. Firstly, the upfront cost of the vehicle must be aggressively negotiated in the same way you would with any other type of finance. Paying sticker price for the vehicle is not ever a great idea. Further, the additional cost of paying sticker are magnified inside the lease when you factor in the time cost of money and the interest rate. Secondly, the rate on the lease and fees need to be examined and aggressively negotiated. In short, it will always be better to buy well and pay a lower rate and then package that product.

In November 2015 we had a week in the office where 4 out of 8 applications that came in had at least one applicant with a novated lease. I started to make some calls to really get to the bottom of how the products work and why people are attracted to them. The first call I made was to a Sydney based commercial brokerage who specialises in business equipment finance and executive vehicle finance. I explained how police officers are paid and gave examples of the leases. I then called a similar brokerage in Victoria known to be an industry leader in equipment finance.  The both said the same thing. That is, that these leases make the most sense when the employer is effectively paying for them as a bonus over and above salary. When the are self-funded, the way police do it, the principles still work but the make less sense.

The real concern is how having the novated lease affects the customer’s ability to borrow. With over 30 lenders on panel getting to a summary of how banks treat the novated lease is not easy. However an examination of how the majors do it gets us to the core of the issue.

Combination of pre-tax salary sacrifice and post-tax contribution basis

With the major banks, the pre-tax salary sacrificed component is to be excluded from income & servicing as it represents the amount the employer pays directly to the novated lease.

The post-tax contribution must be included as a commitment as commitment or liability. 

Policy Example:

The total package (gross) = $100,000

Cash component (gross) = $90,000

Salary sacrifice (novated lease) = $10,000

Customer also has a post-tax contribution (novated lease) of $10,000

In the above example, the $10,000 salary sacrifice is excluded from income and the $10,000 post-tax contribution is included as a commitment as it is the contribution/deduction from the customer’s pay (to cover the difference between what the employer pays directly to the novated lease and the actual novated lease commitment). Only the cash component of $90,000 can be used for servicing or the affordability calculation.

This simply means that the pre-tax amount is excluded from your usable income and the post-tax part is counted as a loan or liability. Immediately you can see the effect this will have on your ability to borrow.

This is how the major banks assume the lease works primarily because this is the type of customer they were designed for. That is someone who in the example above gets paid $90,000 in cash and $10,000 in car allowance as part of the package.

However, let’s have a look how they are structured for police.

Police Real World  Novated Lease Example:

The total package (gross) = $100,000

Cash component (gross) = $100,000

Salary sacrifice (novated lease) = $10,000

Customer also has a post-tax contribution (novated lease) of $10,000

In the example above, Police Real Novated Lease, you see that the total package is the same as the cash component. This recognises that the officers pay is determined by the award independent of the vehicle. The vehicle agreement is at will and nothing to do with the employer. The employers only involvement is to arrange the deductions pre and post tax.

The ability of the police officer to get a home loan is reduced because the method banks use to determine affordability does not account for the fact that the vehicles running costs have already been paid for.

A Real World Solution for Police

We actively petition lenders for changes in credit policy when those policies disadvantage our customers. As you can imagine we get mixed results. Some lenders listen and offer case by case exceptions while some react how you would image, like banks.

In an ideal world, we would simply skip those banks and look at others. However, often the reason we seek concessions is that everything about the scenario points us to this lender except for one particular piece of the puzzle being the novated lease.

Add backs make the difference

The banks who get it let us use add back to account for the benefits to the customer.

We have 2 types of add backs. Top line add-backs and tax-free add backs.

Top line add-backs are a concession the lender lets us use the offset the lease cost. An example would be a $5,000 increase in income that is input into the lender’s calculator. In this case, the officers on an income of $90,000 would be allowed to use $95,000 of gross income. We would then deducted the cost of the lease pre-tax and post-tax.

Tax-free add-backs have a much greater impact. We have various lenders who allow us to add back, for example, $7,500 to income to account for the cost of the lease. Being tax-free income it has a greater dollar for dollar impact on capacity.

Final word on novated leases and home loans for police officers

Providing solutions for customers with novated leases is something we have had to become very good at. Customers fall into two camps. Those who tell us they love the novated lease and those who would never take out another one. This makes perfect sense as for the right customer the product works. However, when it comes to home loans it is factually a little harder to get the home loan you want with the lease. If you are thinking of getting a home loan and a novated lease simply ca the novated lease after your home loan is secured.

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