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.
- The TAL payment cannot be used.
- 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.
- 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.
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.