Archive for March, 2011
Generally lenders are happy with the risk of an 80% Loan to Valuation Ratio (LVR). That is, your deposit or capital is 20% of the purchase price or property valuation. So what happens if you don’t have a 20% deposit?
Beyond this LVR, the lender seeks to transfer the additional risk involved by having the transaction insured by a Lender’s Mortgage Insurance (LMI) provider. Contrary to popular belief, this insurance does not cover the borrower but rather covers the lender for loss in the event you default on your loan – and you bear the cost of the one-off premium!
Because the risk to the lender/insurer is higher with higher loan amounts and LVRs, the premium is calculated on a sliding scale and higher loan amounts and LVRs attract a higher premium. Based on a purchase price of $330,000, LMI at a 90% LVR would be in the order of $3,800, while the premium at a 95% LVR would be around $10,500.
There are two major providers of LMI in the market which are used by most lenders; however some lenders have negotiated better deals with the insurers so the premium can vary between lenders. Additionally, some lenders will take the premium from your loan proceeds, while others will allow you to add or capitalise the premium to your loan amount. Being able to capitalise the premium is beneficial if you really need to maximise your borrowing capacity as it is not an up-front cost you have to meet, and essentially allows you to borrow up to 97% of the purchase price. By way of example, if you were to borrow at a 95% LVR to purchase a property for $330,000, your LMI premium could be approximately $10,500. By being able to capitalise the premium, the deposit you need to provide to the purchase is effectively reduced by $10,500.
Lender’s Mortgage Insurers have their own credit policies which are generally more stringent than the lender’s own policies, so even though your application may pass the lender’s credit assessment, sometimes the mortgage insurer may decline your application when applying their own policies. Further, some lenders simply adopt the Mortgage Insurers credit policies as their own meaning it is sometimes more difficult to get a loan from them. On the flip side, some lenders have a Delegated Underwriting Authority (DUA) from the mortgage insurers meaning they can accept/approve insurance proposals on behalf of the insurer resulting in more ease in obtaining a finance approval.
In summary, LMI can be a significant cost and impediment to obtaining a finance approval so it pays to make sure you know what you’re doing when taking out a loan involving a LVR higher than 80%, especially where multiple properties are involved when correct structuring of the transaction is required to minimise LMI costs.
If in doubt, consult your mortgage adviser.Read more
In a nutshell, Character refers to your overall suitability as a borrower based on past behaviours. Even if you have good Capacity, Collateral and Capital, a poor assessment of your character may lead to difficulty in obtaining finance.
Lenders prefer to see stability in employment and residence when assessing applications e.g. someone who has had 5 jobs in the past 3 years is not going to be viewed as favourably as someone that has had the same job for 10 years. That’s not to say instability in employment or domicile will count against you, but if won’t help if you have other negative aspects to your character, collateral capacity of capital. Some lenders will however require you to have a minimum length of time in your current role, say 12 months, or have worked in the same industry for 2 years for example.
A lender will also assess your net asset position relative to your age and income. That is, have you displayed financial discipline by saving or accumulating tangible assets or have you spent all your income and more by accumulating numerous credit card debts? If you are 35 years old on a good income and have no savings or assets the lender is going to ask questions.
The conduct of your exiting loans is a big factor and if you are re-financing, you can’t expect a lender to take you on if you are in arrears or have missed payments on your current home loan or credit cards. Lenders will normally get at least 3 months loan or credit card statements from you to see what your repayment history is like.
Lenders will obtain your credit file from Veda to see what recent enquiries are listed. Even if you have no defaults and have not taken out any loans recently, if you have had many enquiries listed this can lead to a decline decision, particularly where mortgage insurance is involved. Enquiries can be made by anyone who provides credit on things such as mobile phone contracts, store credit like interest free promotions etc.
Taking it one step further, lenders will take a dim view of any defaults that may be listed on your credit file with Veda. If you planning to buy a home or refinance your loan it is a good idea to get a copy of your credit file before applying for a loan to make sure there aren’t any nasties on your file. Even an unpaid phone bill can limit your capacity to access finance.
On a final note, a lot of lenders now use complex credit assessment processes known as credit scoring. All your information is fed into a computer and your application is “scored” based on the lender’s assessment policies. If you fail the credit score your loan will be declined and in some instances the decision will not be reviewed by a credit officer. This is the classic “computer says no” decision. Depending on your circumstances, it helps to know which lenders don’t credit score.
As always, if in doubt, consult your mortgage adviser.Read more
Borrowers who use mortgage brokers are more satisfied with their home loan than those who don’t, new research has found.
According to the eighth MFAA/Bankwest Home Finance Index survey, 67 per cent of respondents felt they got a better home loan deal from a broker than a bank.
MFAA chief executive Phil Naylor said the research had revealed that borrowers liked using brokers because they are knowledgeable and have access to a wide range of lenders.
Experience was also a strong indicator, with 30 per cent of respondents saying brokers are more experienced than lenders, up from 24 per cent last year.
“Borrowers also like the fact that brokers do most of the hard work for them,” Mr Naylor told The Adviser.
The survey found that the overall proportion of consumers understanding the benefits of using a broker is at its highest level at 36 per cent, while awareness of their services is at 79 per cent.
Source: The Adviser Bulletin – James MitchellRead more
Capital refers to the cash deposit you contribute to a purchase and is sometimes referred to as “hurt money” by the lenders. i.e if something goes wrong with the deal, how much of your own money is in the deal.
Typically banks will advance 80% of the purchase price with your capital contribution forming the other 20%. This is referred to as the loan to valuation ratio or LVR.
Banks will lend more than this 80% LVR, sometimes up to 95% of the purchase price, but only if the borrower pays for Lender’s Mortgage Insurance which transfers the risks of default to the insurer.
The main point to consider with capital is that the higher the level of capital contributed, the more the lender’s risk is reduced. In some circumstances, a higher capital contribution from the borrower may partially mitigate any concerns the lender has about any deficiencies the borrower’s creditworthiness.
We are also seeing some lenders now charging lower interest rates for loans where the level of the borrowers deposit or equity is higher thereby reducing the lender’s risk. This discount is typically applied at LVR’s of 75% or lower.
Next time we’ll look at Character which is possibly the most important of the 4 C’s.Read more
Last time we discussed broadly the methods by which lenders assess your servicing capacity. This time we’ll look at Collateral.
Put simply, Collateral is the physical security you offer the bank to support your loan. With a home loan, the collateral is usually the house being purchased over which the lender will take a mortgage. In the event that you cannot repay the loan, the lender will sell the security to recoup the loan capital.
When assessing the suitabilty of the property as collateral, the lender will normally look at the likelihood of the property to be sold within a period of around 3 months and their valuation will reflect this.
In a home loan situation the lender will normally lend 80% of the valuation of the property. This is known as the LVR or Loan to Valuation Ratio. For acceptable securities, higher LVR’s are available through the payment of Lender’s Mortgage Insurance (LMI) which will be discussed another time. However, for certain types of properties where there is doubt as to its saleabilty within a reasonable time e.g Studio Apartments or Company Title, the LVR can be reduced significantly depending on the lender.
Part of the process of assessing whether the collateral offerred is acceptable to the lender is obtaining a valuation. The method a valuation varies from lender to lender and depending on the circumstances of the application. For example, in a purchase application, some lenders may simply accept the purchase price as the valuation, whereas another lender may require a registered valuer to inspect the property and prepare a full written report. In some circumstances the lender may conduct a “desktop” valuation where they use publicly available sales information to assess a value, or they may do a “kerbside” valuation where they simply inspect the property from the street.
When assessing the suitability of the property as security the lender/valuer will assess the value of the property based on recent comparable sales in the area i.e. simlar properties that have sold in the past 3 months. But it’s not just about the dollar value. They will also rate each property on a scale of 1-5 in terms of saleability, volatility of the market, likelihood of a decline in value of the next 2-3 years, environmental factors etc. If any of these ratings are in the higher risk categories, there is a chance the collateral/security will not be acceptable to the lender, particularly where Lender’s Mortgage Insurance is involved.
Next time we’ll have a look a Capital.Read more
The slick marketing campaigns of the major banks have made front page news over recent days as all of the Big Four appear intent on growing their home loan numbers through the waiving of fees, reduced interest rates, new products and other enticements.
These offers come as a result of the banks having easier access to money on the international wholesales markets, which means they’re all cashed up and ready to lend.
In recent weeks we have also seen some normalisation of lending criteria which closer reflects the requirements pre-GFC, coupled with the release of several new home loan products.
While this looks like good news for consumers on the surface, it further highlights just how difficult it can be to navigate the increasingly complex home loan market.
Taking out a home loan should be viewed as potentially a long-term proposition – chances are you’ll have the same home loan long after today’s marketing campaigns are tomorrow’s fish and chips wrapper.
There has always been much to consider in choosing a home loan that best suits your individual circumstances both now and into the future and this hasn’t changed, despite the developments of recent weeks.
As always, if you’d like some quality advice to cut through all the spin and help determine the best option for you, please talk to your mortgage adviser.Read more