Most people want to know the answer to three simple questions:
1. How much can I borrow?
2. What will my repayments be?
3. When can I get the loan?
When people enquire about a home loan I find the most simple way to explain what is required is that you need to meet two criteria, a deposit – or what is called ‘funds to complete’ in the industry, and the ability to service the loan.
The deposit
The deposit or funds to complete comprises the minimum deposit a bank will accept. Most banks require at least an 8% deposit and a few require 5%. Please note there is a separate article for no deposit home loans. When searching on the internet be aware of 98% lends – this does not mean you only require a 2 % deposit – invariably you require a 5% deposit and mortgage insurance of 3% is added on to the loan.
The catch with ‘low deposit home loans’ is you will still need funds for mortgage insurance. In most cases this cost can be ‘capitalised’ – that just means added on to your loan – and each lender will specify the extent to which the cost can be added on. If you have a deposit of 20% or more you will not have to pay mortgage insurance. Furthermore you need the funds for the governments stamp duties and transfer costs.
Each state is different and certain states allow certain concessions– typically for first home owners and people building or purchasing newly built. Information on what each state offers can easily be sourced on the internet and most banks have online calculators to simplify the process.
Finally you will require the costs for a conveyancer – especially when a new purchase is involved and some lenders will charge application, valuation and settlement fees. The minimum deposit a bank will accept may have additional criteria that need to be met. For example you cannot ‘borrow’ the funds to obtain the deposit, if the lender requires ‘genuine savings’ it means they need proof of the funds in your bank account over a 3 month time frame whereby they will be able to analyse your savings pattern. Some lenders will accept that you have been renting for 6 months and use this to establish your financial behavior in lieu of the 3 months savings history. If you have a deposit of 15% or more the bank will just need proof that you have the funds – such as ‘proof of balance’ and not any other financial history, this is because it is considered lower risk and less information is required.
Involving an independent mortgage broker will help guide you through the best options for your circumstance.
If you are self-employed there are 2 industry terms lenders use when offering loans: ‘alt doc’ and ‘full doc’, sometimes alt doc (alternative documentation) loans are also referred to as low doc loans or self-employed loans.
A self-employed person may conduct their business in a partnership, company, trust or as a sole trader, all of these entities are considered, but each with different criteria.
Full doc loans invariably require the last 2 years of business and individual tax returns accompanied by notices of assessment, some lenders only require one year and may require you to contribute more funds as a deposit.
Alt doc loans require the borrower to declare their income level by signing an income certification form and supporting this with one or more of the following, a letter confirming the same from their accountant, business activity statements for the past 6-12 months or business banking transaction account statements for the last 6 months. As alt doc loans require less documentation to substantiate the borrowers income they are considered more risky and for this reason they typically require a 20% deposit and are offered at a higher interest rate (and depending on the amount of deposit may also require the payment of mortgage insurance or a lenders risk fee).
When applying for a self-employed loan you need to meet the criteria of being a beneficial owner, for example you cannot be a beneficiary of a trust with no involvement in managing the trust to use the trust income for your loan serviceability. The typical requirements to prove beneficial ownership require you to have at least a 25% share in the business from both a management and control perspective.
Being able to understand your business structure and analyse your financials is our speciality. This can be a confusing area for some clients and their finance advisers, ensuring your requirements are presented correctly to the lender will increase your chances of a successful outcome. Furthermore, some self-employed clients may also have commercial or asset finance requirements and your entire lending position can be optimized by looking at it wholistically. Jennifer Robinson is a Chartered Accountant with a taxation and accounting background which assist in understanding both your current scenario and your requirements, it also simplifies the process so you can easily understand and meet your finance objectives.
Once you meet the ‘deposit’ and ‘serviceability’ criteria you are able to be pre-approved for a loan. This is always the safest way to proceed as you know your finances are in order and enables you to negotiate harder when purchasing a property. Essentially, a pre-approval means the bank is comfortable providing finance to you on the condition that you find a suitable security, such as a house or unit.
Purchasing a property (the security)
The security is the asset the bank registers a mortgage against in order to provide you with finance. In this case the asset is residential property. When you sign a contract to buy a property it is normally safest to sign a 14 day finance clause and a further 14 day settlement clause. Even if you are pre-approved for finance the bank still needs to arrange for an independent valuer to inspect the property and present a valuation report.
Amongst others, factors taken into consideration are the location, size of the house and the land, the condition of the property and the recent market activity in the immediate area. Valuers or lenders may refer to comparable sales, which means they have analysed the property value in comparison to similar sized and aged properties in close proximity. You can always get an estimate for yourself by comparing to known sales in the area and products such as rpdata and corelogic assist with this (this is known as a comparative market analysis). Doing as much research yourself into the recent activity in the location you are buying definitely aids you in making your best, and most informed, offer.
If you are buying at auction you need to be aware there are no conditions in the contract, so in essence your finances must be in order including the fact that the property will meet all the banks criteria regarding the valuation.
Sometimes clients are disappointed in the results of the valuation and in rare cases a second opinion may be obtained. However, the valuer is independent of the bank and essentially protects you from over committing yourself to a potentially over-valued asset.
Lenders certainly favour some securities over others and this is essentially based on the risk profile of the security. For example, lenders are more willing to lend at a higher loan to value ratio for properties that are in close proximity to the city and amenities versus rural properties. All lenders have different criteria and preferences, I am here to guide you if you are looking at a security that’s not quite the norm.
Furthermore, it is always a good idea to get a building and pest inspection done so you know the house is sound and meets your expectations, most importantly that no defects have been covered up by a fresh coat of paint or a similar quick fix.
Other factors affecting your serviceability are your existing commitments or other debts. The more debt you have the lower the amount of funds you will be able to borrow.
All existing debts are taken into account by reviewing the monthly repayment amount, interest rate, remaining loan term or an amount based on the credit limit of the facility, documentation is required to support the existing commitments you have.
The bank will also do a ‘credit check’ this is to make sure all debts have been disclosed and there is no non-disclosure. It is of paramount importance to disclose all debt as any non-disclosure can be an immediate decline for finance. Sometimes clients forget about a store card they signed up for 3 years ago and have not used, or if they are using a facility such as ‘after pay’ they may not see it is a commitment they need to disclose, it’s always best to mention absolutely everything to your advisor and if necessary you can order your own credit report. Other pertinent information on your credit report is your account activity, financial institutions are now legally obliged to provide data on your account behavior. Comprehensive credit reporting details your account conduct, for example, are you in arrears, how long you have been in arrears for, are there dishonoured payments, etc. All of this information together illustrates your financial responsibility and influences your ability to obtain finance. Some lenders ‘credit score’ meaning the results of various criteria are electronically analysed upfront that may immediately decline your ability to obtain finance. Not paying a phone bill over $150
can influence whether you can obtain finance with a 5% deposit or if you require a 10% deposit so keeping your finances and existing commitments in order is vital.
Finally, your servicing is influenced by your household expenses, which in turn is influenced by the number of dependents or people living in the home. Expenses are often validated by analyzing at least one month’s transactional banking history and/or credit card statements. These household expenses are categorized so that consideration is given to a comprehensive list of expense types.
