Everyone likes to be offered something special and the banking industry certainly hasn’t forgotten dentists in this regard. This article will profile the special offers available to dentists in respect to home and investment residential mortgages and how to make the most of them.
The reason banks like dentists as customers is due to their earning capacity and historic default rates. A dentists’ income is typically viewed as being relatively stable – although that assumption has been tested a bit by the industry in the last few years with various events such as Medicare, etc. That said, when a bank lends money to a dentist, they do not expect to lose money as the historic default rates are close to zero.
What’s on offer?
There are a variety of lenders that offer special deals to dentists with St George and Macquarie Bank being the most recent banks to launch a medico package. Most of the packages on offer allow dentists to borrow certain percentages of a property’s value (i.e. more than 80%) without charging lenders mortgage insurance. Mortgage insurance is a once-off fee that is charged by the lender to protect their risk. The fee varies depending on the loan amount and percentage borrowed but it’s typically in the range of 2% to 3.5% of the loan amount so it can be a sizeable amount – especially if you are borrowing over $1 million!
Here is a summary of the offers (this is a summary only so please be aware that there might be particular exclusions or conditions that may apply in some circumstances):
- Westpac: Westpac has had a medico package for over 20 years and has a very good understanding of the industry. Westpac will typically lend dentists up to 95% of an owner-occupier property’s value on an interest only basis without mortgage insurance or 90% if it’s an investment property (also interest only). The maximum property value is $5 million to qualify for a waiver.
- Commonwealth Bank: CBA’s medico package is approximately 3 years old. It will lend dentists up to 90% of a property’s value without mortgage insurance and the maximum property price can be up to $2.34 million. Repayments can be interest only.
- St George/Bank of Melbourne: St George will lend dentists up to 90% without mortgage insurance with the maximum property value of $5 million (similar to Westpac’s offer except that it won’t lend 95% for owner-occupier loans and their credit is a bit inflexible).
- Macquarie Bank: Similar to CBA’s package, Macquarie Bank will lend dentists up to 90% without mortgage insurance up to a maximum loan amount of $2 million.
- BOQ Specialists (formally Experien and Investec): BOQ Specialists will consider lending up to 100% of a property’s value but this is typically limited to a dentist that is buying their first home. In this situation, the dentist will need to make accelerated repayments to reduce the debt within 5 years. BOQ Specialists will also lend up to 90% of an investment property’s value with interest only payments without mortgage insurance.
- Medfin: Medfin is 100% owned by nab and will lend up to 95% of an investment property’s value without mortgage insurance with the commitment that the borrow reduces the loan to 90% within 3 years (i.e. repay 5% of the loan amount in 3 years). Repayments can then be interest only.
- Citibank: Citibank does not have a specific medico package but it has a blanket policy of lending up to 85% of a property’s value regardless of the applicants occupation.
What sets them apart?
Your ability to borrow over 80% can be very attractive as it allows you to leverage your assets to grow your wealth. However, there isn’t a massive difference between most of the packages so it’s important to consider the other factors that set them apart and these factors can vary dramatically. There are three main differentiating factors:
- Credit policy and ease of approval: The lenders knowledge of your industry can make a big difference. If the banker or broker that is looking after you has dealt with many dentists for many years they will have a detailed understanding of the industry and your structures, etc. and be able to present your application to the lender in the best light. If the credit manager also shares the same understanding you can expect a smooth approval. Not all lenders are equal in this area and making the wrong choice here can result in weeks or months of delays and frustrating requests. The lenders that have been servicing the dental market for the longest (being Bank of Queensland and Westpac) tend to be the best for complex applications.
- Interest rate discounts: Interest rate discounts have to be negotiated on a case-by-case basis as its often possible to get-better-than-advertised discounts. Lenders discounts can change spasmodically so it’s difficult to provide you with any meaningful guidance about which lenders are best.
- Ongoing banking services: The lenders provide different banking structures and services to deal with your ongoing banking needs. If your needs are not that complex (i.e. you do most of your banking online, etc.), then I wouldn’t place a lot of weight on this factor.
The one final consideration is the bank’s valuation of your property. There is no point in using a lender that lends 95% if its valuations are always too low. In this instance you might be better using a lender that only lends 90% of a high, more realistic valuation. Therefore, it can be wise to approach multiple lenders or a mortgage broker.
If your situation is complex or a bit ‘outside of the square’, it is possible that the abovementioned offers will not necessary fit your circumstances. In this situation is might be possible for some lenders to offer tailored structures that allow you to cost-effectively utilise your equity and minimise your cash flow and interest bill.
How to take full advantage of these deals
Don’t be complacent – you really need to do some shopping around and speak to a couple of lenders. If you are not prepared to spend this time investigating your options then engage the services of a mortgage broker experienced with assisting dentists.
Borrowing 90% to 95% of a property’s value can provide a number of benefits:
- Buy your first home now – if you have recently graduated you might be keen to get into the property market and buy your first home. The ability to borrow 95% to 100% will allow you to do this sooner.
- Invest more sooner – the ability to invest more sooner allows you to benefit from the major necessary ingredient that every low-risk investment strategy needs: compound annual growth. The difference between buying a $600k investment property today versus in 5 years’ time amounts to an additional $1.9 million of equity in 30 years’ time.
- Upgrade or renovate your home – you may have worked hard to accumulate the amount of equity you have in your home now but are ready for an upgrade. Borrowing a higher percentage will allow you to upgrade sooner – especially important if you plan on keeping your existing home as an investment.
- Leverage residential equity to fund your practice – commercial practice, equipment, fit-out and goodwill loans typically attract higher interest rates and sometimes are more draining from a cash flow perspective if they require principal repayments. Sometimes a better solution is to access equity in your residential properties via a standard investment mortgage and use these funds to fund your practice debt.
- Help your kids get into property – more often our clients are talking to us about helping their children get into the property market and how to structure it to ensure the family is protected. Sometimes using a loan against the equity in your investment property (not your home) is a good way to structure this. If you have more than one child you may need multiple facilities. This can be a bit of a minefield so please get some professional advice.
Don’t mix business with pleasure
I have been taught a valuable lesson through some of my clients’ experiences to never mix practice and personal lending. That is, do not have your practice transactional business banking and/or lending with the same bank as your personal home and investment lending. The reason for this is that the bank has too much control and too much information. If you apply for an investment loan, they can look up your practice bank account and start asking lots of questions whereas if your banking is elsewhere, they will normally just look at your tax returns. Never put your eggs in one basket.
You’re in the driver’s seat!
As I have hopefully demonstrated, there are lots of offers available to dentists that allow them to leverage their income to build an asset base. Debt is a great servant but a bad master so you always need to borrow safely, consider the impact of future rate increases and ensure you have loan and cash savings buffers. It is possible that just one lender won’t necessarily fulfil your needs.
Contact us if you need any advice or assistance with your borrowings (or click schedule an appointment on the right hand side of the page).