Home Loan Rate – Australia

What are genuine savings?

The majority of Australian lenders have a policy requiring you to have “genuine savings” before they will approve your mortgage. In effect, it is proof of your ability to manage your money effectively and live within your means.

Genuine savings is not necessarily money saved in a savings account, it can come in many forms and each lender has their own policies regarding what is and what is not genuine savings. As a general rule if you are borrowing over 80% LVR then you need to prove 5% of the purchase price as genuine savings.

Common genuine savings types

These types of genuine savings are regularly accepted by most major lenders:

• Savings that have been made or held in an account for three months or more (including First Home Saver Accounts).
• Shares or managed funds that have been held for three months or more.
• Term deposits that have been held for three months or more.

Ideally your savings should be held in a separate account to your day to day spending and the balance of your account should be increasing over the three month period. Any large lump sum deposits during the three month period will not be considered as genuine savings.

What is not genuine savings?

The deposit for your new home can come from many different sources. The vast majority of sources that do not involve you saving the money yourself will not be considered as genuine savings. Some examples of deposit types that are not accepted as genuine savings are:

• Financial contributions from your family or parents (e.g. gifts / loans).
• Loan from a friend.
• Personal loans / cash out from credit cards.
• Vendor / builder rebates, cashbacks or discounts.
• Pay in advance from your work.
• Money saved in cash (i.e. not in a bank account).

As a general rule if it doesn’t meet the genuine savings criteria listed above then it will not be considered as genuine savings.

Don’t worry too much! You may qualify for a no genuine savings mortgage, if you apply with the right lender this requirement may be waived. In most cases the cost of a no genuine savings home loan is very similar to a loan with a requirement for genuine savings.

Grey areas…

The policy used by lenders to assess genuine savings is very complex, and in addition to this there are some types of savings that can be accepted on an exception basis. The secret to getting approved is to apply with a lender that accepts the type of genuine savings that you can provide.

Some examples of genuine savings that may or may not be accepted by the lender are:

• Equity in existing real estate (i.e. you own a property already).
• Extra repayments on your debts made over the past three to six months.
• Rent payments (must be through a property manager and have been 12 months in your current residence).
• Tax refund (must be currently renting to be accepted).
• Inheritance (must be currently renting to be accepted).
• Sale of a non-real estate asset (must be currently renting to be accepted).
• Commission or bonuses from your job (must be currently renting to be accepted).
• Money that comes from a non-genuine source (e.g. a gift) that have been held in a savings account for three months or more.

Please refer to the specialist mortgage brokers at the Home Loan Experts if you would like to know more about using one of these methods to prove genuine savings. You can view their page on genuine savings for more information.

Do the major banks require genuine savings?

Yes, at present all of the major banks have a requirement for genuine savings. ANZ & CBA tend to be quite strict with this requirement while Westpac (WBC), NAB & St George (SGB) have slightly more flexible policies. Please note that all of them are relatively strict when compared to lenders that do not require genuine savings at all and have similarly priced mortgages!

In addition to this the two major LMI providers Genworth and QBE LMI both have requirements for genuine savings under their standard products. Both will accept no genuine savings loans under their non-standard LMI products however the LMI premium may be higher and credit assessment will be significantly stricter.

When you apply for a mortgage, your lender will calculate the Loan to Valuation Ratio (LVR) of your loan. This is an important part of their assessment criteria. The higher your LVR, the higher the risk to the bank in the event that you default on the loan.

The LVR is a simple formula based on the loan amount divided by the value of the property. It is expressed as a percentage. Please note that in most cases the purchase price of a property and the bank valuation will be the same, however if there is a difference then the bank will use the lower of the two to calculate your LVR.

Example LVR calculations

If you are applying for a mortgage of $250,000 on a property valued at $300,000 then your loan will have a 83.33% LVR. This is calculated as 250000 / 300000 * 100 = 83.33. In this example you may need to pay LMI as your loan is for more than 80% of the property value.

As another example, if you are buying a property off of a family member and the purchase price is $500,000, the value may be slightly different as this is an off the market transaction. If the bank’s valuer worked out the property to be worth $600,000 then the lender will use $500,000 in their LVR calculation as it is the lower of the purchase price and valuation.

If you needed to take a loan of $450,000 on the above example then your mortgage would have a 90% LVR. This is calculated as 450000 / 500000 * 100 = 90.

Please note that some lenders can use the actual valuation rather than the purchase price, however this is rare and you must be in a strong financial position.

You can use this LVR calculator to work out the LVR for your loan.

When does LMI apply?

Lenders Mortgage Insurance will apply if your loan is over 80% of the property value. You can use this mortgage insurance calculator to work out how much your premium would be.

The banks get insurance on your loan if you borrow over 80% LVR because there is a significant chance that they will lose money if you are unable to make the repayments. The LMI premium is charged to you, the borrower. The higher your LVR & loan amount then the higher your LMI premium will be.

Not every lender has the same LMI premiums, they may use different insurers and some have discounts or LMI waivers available for their best customers.

What is the Base LVR & Final LVR?

Some lenders may allow you to add your LMI premium to your home loan. For example if you are borrrowing 95% LVR and your LMI premium was 2% of the loan amount then the lender may actually give you a loan for 97% LVR.

This is known as LMI capitalisation, and is not available from every bank. The base LVR is the LVR of your mortgage before the LMI premium is capitalised, in this case the base LVR is 95%. The final LVR is the LVR after your LMI premium has been capitalised, in this case the final LVR is 97%.

Find out more about LVRs

If you would like to learn more about the LVR of your home loan then refer to this page on LVR by the Home Loan Experts. They are specialist mortgage brokers and they can assist you with any further questions.

Home Loans for Doctors on a 422 Visa

Did you know? Despite doctors on 422 Visas being some of the lowest risk customers, most banks will not accept them for a home loan. However, there are some lenders that can consider lending up to 90% of the property value.

Contact a specialist mortgage broker such as The Home Loan Experts to discuss obtaining a home loan as a non-resident doctor on a 422 Visa.

What do Australian Banks Think?

Australian banks favor Doctors of Medicine and Medical Practitioners above all other professions, as doctors have secure employment, high income and are known to be low risk borrowers.

Lenders monitor the performance of their existing customers, and as such know which professions make their payments on time and do not default on their loans. This is why Australian banks are able to provide significant privileges to Medical Professionals for Residential Mortgages – even if you are not a resident of Australia!

However, not all Medical Practitioners are eligible for this special offer, as these discounts are aimed at graduating professionals and those in selected medical professions.

Am I eligible for a 422 Visa Home Loan?

Below is a list of some medical professionals who are accepted:

• Doctors of Medicine (eg, Anaesthetist, Dermatologist, Gynaecologist, General Practitioners)
• Dentists
• Psychiatrists
• Oncologists
• Optometrists
• Cardiologist
• Surgeons
• Radiologists
• Osteopaths
• Psychiatrists
• Veterinarians
• Physiotherapists
• Radiographers (case by case)
• Pharmacists (case by case)

Change in Visa Subclass

Following the creation of flexible working arrangements for International Medical Graduates (IMGs) under the 457 visa, the subclass Medical Practitioner (Temporary) Visa (Subclass422) was no longer available for new visa applications from 1 July 2010.

However, this new arrangement does not mean that the 422 visa has expired – you will still be able to use your 422 visa until the end of the visa validity period, you are granted a new visa subclass, or you change your employer sponsor.

Merging the Subclass 422 Visa with the 457 Visa streamlines the process for non-residents and temporary-residents, and reduces confusion as to the appropriate choice of visa.

Note that if you are a Doctor of Medicine or Medical Practitioner on a 457 Visa, specialist mortgage brokers can still assist you with special discounts.

What happens next?

We understand that obtaining your medical degree took a lot of time, effort and money and as such your cash may be a little tight right now. Often it takes time to get a deposit together to buy a home, let alone cover the high cost of Lenders Mortgage Insurance.

Thankfully mortgage brokers have already done the research for you, and automatically know which lender will be best suited to your unique situation. This means, that you will not have to go through all the red tape to find the best deal for you!

Contact a specialist mortgage broker such as The Home Loan Experts to discuss obtaining a home loan as a non-resident doctor on a 422 Visa.

When applying for a mortgage, no doubt you have shopped around for the best interest rate and lowest fees. However almost nobody checks to see if their application meets the lenders guidelines & credit policy!

You see, the problem is that lenders don’t publish their rules to the public. That would make it too easy for people to find loopholes and “game” the system. Every financial institution in the USA, UK & Australia has its own set of rules they must abide by before approving a mortgage.

The credit assessor in the bank who signs off on the approval must follow the guidelines which has been created by the bank, otherwise they risk losing their job. For this reason credit policy is often treated like gospel, and it is rare for policy exceptions to be made.

Each financial institution lending money has different guidelines with specific differences and certain things they cannot approve. This is where the assistance of a mortgage broker is essential as they have knowledge and access to all the lenders guidelines to make sure that your application is perfect for the bank that it will be placed with.

For a standard application with a large deposit, long term employment and no credit history issues this is considered as the perfect application for a bank & will be accepted by everyone. But let’s be serious, not many applicants are like this. Many people have credit impairments, short term employment, unsecured debt, a small deposit or a combination of all of these.

What is in the Lenders Guidelines?

The Lenders Guideline is the rule book of what the Bank looks at and what they can accept when approving your loan:

• Employment – Banks generally require a minimum of 6 months in current job, most do not accept probation and usage of casual or 2nd Job Income must be evident over 12 months.
• Credit Report – Mainly for credit impairment the lenders guideline will advise how many defaults, amounts or timing of defaults which are acceptable to them.
• Savings – Generally all lenders are now requesting that evidence of the deposit be saved over a 3 month period this being called “Genuine Savings”.
• Age – Although lenders are not allowed to discriminate against age, but they may show a stricter view to people who are close to retirement.
• Security – All Lenders will have a list of what type of securities they can take on, this will also provide of list of types they cannot accept and certain areas that they will not do either. Vacant land is a prime example this will advise the maximize size of land they can accept.
• Types of loans – The Lender Guideline will outline what type of loan the bank can accept from purchase, refinances, low doc, guarantor loans, trusts or company purchases.
• Documents – from payslips to tax returns this will outline what is required for each client.

As you can see the guidelines are complex. However the key is that they vary between lenders! Apply with the right lender and your problem is solved! The best way to find the right lender is to use a mortgage broker who specialises in the credit policy of each bank.

Has mortgage jargon left your head spinning? Cut through the confusion with this easy to understand guide that explains the common features of a mortgage & how they can help you to repay your loan sooner!

Redraw

Loan redraw gives the borrower the power to withdrawal any additional repayments to which were made on top of their minimum loan repayment. Eg If the borrower has been making an additional repayment of $100 on a monthly basis, then after 12 months they will be able to redraw $1,200. Note that the borrower is not restricted by the 12 months duration before they can redraw. However, please be advice that some lenders may charge a fee for loan redraws and in the case of fixed rate loans, redraw is not available.

Extra Repayments

This feature grants the borrower the freedom to make extra repayments into their loan on top of their minimum loan repayment. Eg, the borrower has a minimum monthly loan repayment of $1,000; but instead of paying the minimum figure they pay $1,500 per month into their loan. This means that they have made an extra repayment of $500 into their loan. Please note that for fixed rate loans, extra repayments is not available.

Discounts Available for Higher Loan Amounts

This feature is a discount against the loan interest rate to which most lenders provide against their standard variable (professional package) loans. Eg, CBA offer what is called a MAV concession for their customers for loans starting from $150,000 – $349,999 at 0.50% discount per annum. The larger the loan amount is the higher the discount is.

Mortgage Offset Account (100% Offset)

An offset account is a regular cheque account that has ATM, cheque book and internet access that is linked to the borrower’s home loan when the loan is setup. Instead of earning interest on the money in their offset account, the borrower is able to save interest on their home loan. Eg, if the borrower has a loan with the balance of $100,000 and they have $10,000 in their offset account then the interest is only calculated on the loan net balance of $90,000.

Line of Credit Option

A line of credit mortgage is a type of loan that allows you to use the loan as your cheque account and allows you to draw down and repay the loan as you choose. It is similar to a credit card in that it allows you to withdraw funds at anytime up to a set limit. You are also given a choice to make repayments on either a monthly basis or with some loans you don’t have to make a payment as long as you remain below the limit. A line of credit can be used to purchase most types of properties, whether it be a family home or an investment property. As the borrower you can use the line of credit to carry out renovations, pay your bills or invest in shares.

Ability to change to Fixed Rate (Fixed Rate Loan)

This is the feature to which the borrower is allowed to change from a standard variable rate loan to a fixed rate loan. A fixed rate loan is a loan where the interest rate is guaranteed to remain the same regardless of what happens with the variable rate market. Usually, the interest on a fixed rate loan is only fixed for part of the loan term, typically 1 – 5 years.

How can you buy a home without a deposit? In a post-GFC world there are no loans available that will allow you to borrow 100% of the purchase price without providing additional security. In the past it was possible to obtain loans for up to 106% of the purchase price through lenders such as First Permanent, who did not require any additional security for their loans.

In modern times, the only loans that can allow you to borrow 100% are known as guarantor home loans. There are several different types of guarantees, however the most common is known as a family pledge home loan where your parents offer their home as additional security for your loan.

This isn’t as risky as it sounds! The guarantee can be limited to just 25% or less of the loan amount. You can apply for income protection insurance and life insurance to reduce the risk that you will be unable to make the loan repayments. You can also avoid borrowing to your limit which will enable you to have enough spare funds to make additional repayments, and so clear the guarantee as quickly as possible.

What are the benefits for you of using a family pledge mortgage? Firstly you can borrow 100% of the purchase price, or even a little more to cover costs such as stamp duty & solicitors fees. Secondly the approval criteria is less stringent because the lender has more security for their loan. Thirdly you will not be required to pay for expensive Lenders Mortgage Insurance (LMI).

What are the risks to you and the guarantor? The main risk is that if you are unable to make the payments on your home loan then the lender may ask the guarantor to make the repayments for you or may call in the guarantee. In the worst case scenario the lender will try to sell the borrower’s property before trying to sell the guarantors.

We see the main complication of family pledge home loans is generally not when the borrower cannot make the repayments, as this is very rare. The main complication is when the guarantor and borrower have a falling out and the guarantee is required to be removed. In these cases the borrower can apply to remove the guarantee and if they owe over 80% of the property value then they may be required to pay LMI.

Several lenders such as St George Bank, CBA, ANZ, Westpac & NAB all offer this type of loan product. However only St George calls theirs a “family pledge home loan”, the others refer to their loan using different names such as family equity, fast track or deposit kickstart.

Always borrow responsibly and seek legal & financial advice before applying for any type of loan with a guarantee involved.

Australians are known for their innovation and the desire to live the Great Australian Dream of owning a home on a 1/4 acre block of land.  While most people choose to pursue this dream by buying an existing house, some choose to build their homes to their specifications and with their own designs.  They likewise would want to handle the ordering of materials, the scheduling of construction, and other details on their own.

These people are the owner builders of Australia, who build their own homes from scratch without the help of construction companies or licensed builders.  Such a practice has become a growing trend, and a lot more people are choosing to go at it on their own and enjoy the additional control and extra savings.

The only limitations you have is your creativity, the budget you have and in some cases the lack of creativity of the local council!  Aside from that you are totally in control.  However, this control can sometimes work against you, as there is always a tendency to overspend when it comes to the finishings of your home. Who wouldn’t want their home to be perfect?

Owner builder home loans

There are a lot of joys and advantages to being an owner builder.  However, one of the main disadvantages is the difficulty of procuring a home loan.  This is because banks and non-bank lenders are somewhat wary of financing an owner builder project.  There are more risks involved, and there is no guarantee that the project will be finished, hence the apprehensions of the major banks.

With the help and aid of specialist mortgage brokers such as the Home Loan Experts, you will be provided with sufficient choices of lenders who trust owner builders and allow them to borrow enough to complete the project.  You can view their webpage on owner building or call them on 1300 889 743.

How does the process work?

If you don’t understand how the process of building a home actually works, then we would strongly recommend that you read the Owner Builder Guide. This will explain the steps involved in building your home, and how to get the most from your sub-contractors and suppliers.

Happy building!