Home Loan Rate – Australia

When you decide to purchase a piece of property, either as a residence or for financial investment purposes, you will most likely need to apply for a loan. Before you will be granted a loan, the bank will want to be certain that you have the ability to make the repayments. This typically requires you to produce tax documents and check stubs, but not everyone can do this.

Applying for mortgages can be an intimidating process, especially if you don’t have the documentation usually required by lenders. There are a lot of different types of loans available, but many of them aren’t accessible to individuals with little or no proof of income, such as those that are self-employed or work as independent contractors. However, there is an option available: the low doc home loan.

A low doc loan, also referred to as a low documentation loan, is a home loan in which the paperwork used in standard loans is not required. This type of loan is perfect for self-employed borrowers that don’t have the proof of income papers typically used in applications for standard loans. Generally, lenders of low doc loans will ask the applicant to provide some proof of income, such as recent bank statements. In addition, low doc home loans are only available for loan to ratio values up to 80%.

Lenders offering 80% low doc home loans may have varying requirements, however most lenders ask that the borrower meet the following basic criteria:

1. You have been self-employed for at least one year in the country of Australia.
2. You have had an ABN number for at least one year.

The idea behind these criteria is to make sure that the borrower has a steady source of income and can afford to make the repayments. Other requirements may also apply depending on the lender. However, understanding these other requirements can be tricky. The requirements for low doc loans with high loan to value ratios, usually between 60% and 80%, are fairly confusing. Below, you will find the details of some typical low doc loan situations.

Issue A:
Refinancing a loan without sufficient business activity statements, or BAS statements.

One option for solving this problem is to acquire a loan with a loan to value ratio between 60% and 70%. Loans for a loan to value ratio of up to 70% can be acquired from one of the major providers without trading statements or BAS statements. Instead, the applicant needs only provide a letter from an accountant confirming that the loan is affordable. In addition, there is no mortgage insurance is required. Some other providers may also provide low doc loans up to 70% loan to value ratio, but the qualifications are stricter.

Another option would be to acquire a loan for a loan to value ratio between 70% and 75%. This type of loan can be obtained through a regional bank with certain requirements. The applicant must have been GST registered for more than 2 years for a loan to value ratio of 75%, but only for one year if the loan to value ratio is 70% or less. This loan is only available if you will remain under $1,500,000 in total loans, including those you may have from other lenders. Not available to developers, primary producers, or builders.

The third solution is to look for a loan with a loan to value ratio between 75% and 80%. Though it is possible to find a loan of this type from providers who won’t ask for BAS statements, the rates and fees will likely be higher than for other loans. In addition, it is not easy to find lenders that will consider cash out loans.

Issue B:
Purchasing a home at 80% loan to value ratio without BAS statements.

In this case, you can get a loan from a non-bank lender, a second tier bank, regional bank, or even a major bank. You will need GST registration and ABN for one year or more. Fees and rate will be comparable among lending institutions.

Issue C:
Obtaining a loan when your exposure is too high with your current lender.

To solve this problem, you will need to engage in debt consolidation and then spread your loans out over several lending institutions so that you meet all of the requirements of each institution. In doing this, it will give you the ability to take out another loan.

Whether you are applying for home loans or personal loans, there are options available for getting the money you need. If you don’t fall under any of the aforementioned circumstances or if you have bad credit, you could also consider using a guarantor to increase your borrowing ability. A guarantor is someone that agrees to be responsible for your loan should you default on it. The guarantor’s assets will be taken into consideration when you apply, which can dramatically increase the amount of money for which you are eligible.

Learn more about low doc loans.

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.

When one would like to get a home loan in Australia, often it involves LMI or Lenders Mortgage Insurance.  Lenders mortgage insurance is as worded, protection for the lender or bank.  Basically it is a premium paid by the borrower to insure the bank in case the borrower is unable to make the necessary repayments.  If you are very behind with your loan repayment, your property may be sold, and if the sale of the property is not enough to cover the loan, then it is the insurance company who answers for the deficit.  However, just because it is made for the benefit of the lender, it does not mean that it cannot be helpful to the borrower.  It can be of help to the borrower when they don’t have enough savings for deposit, and enable them to enter the real estate market earlier.

LMI is also used when your loan to value ratio is at or above 80% of the value of the property.  Loan to value ratio or LVR is another term that is intimately connected to LMI.  Where there is a high enough LVR, usually LMI is required.  To illustrate LVR, for example you would like to purchase a property worth $1,000,000.00.  The 80% LVR that would require LMI is simply 80% of the $1,000,000.00, which is $800,000.00.  Thus when you get a $800,000.00 loan then you will be required to pay LMI, at a very high premium.

Another problem with LMI is that there are so many providers of this type of insurance.  Because there are many providers, a borrower is often at a loss on how to compute the costs in relation to LMI.  To add and complicate things, banks and lenders also do not disclose who their LMI provider is, thus the borrower is left in the dark as to how much LMI would cost.

Thankfully there is an LMI Calculator out there available in order to help the borrower accurately determine how much they would need to save to pay for the LMI premiums, and the other costs in relation to any loan they wish to get.  This will ensure that you have enough funds prepared when applying for your home loan.

Rising housing prices in recent years have made it very difficult for many home buyers to save the deposit. Lenders have recognized this and have created the no deposit loan product.

No deposit loans are generally available for new and established buildings, owner occupied, as well as for investors. To qualify for a no deposit loan you need to be an Australian Citizen or permanent resident and currently living in Australia.
Borrowers often need to acquire lender’s mortgage insurance where the Loan to Value Ratio (LVR) exceeds 80%. Generally, the higher the LVR, the higher the premiums. Hence the premiums on a no deposit loan can be large.

Combining stamp duty exemptions and First Home Owners Grant, no deposit loans allow borrowers to gain a foothold in the market based on their ability to service the mortgage rather than having the savings required to qualify for a more mainstream loan with deposit.

No deposit loans can also be a useful tool for investors wanting to take maximum advantage of leveraging.

While no deposit loans can be secured for similar rates to standard home loans, you should be aware that there is the risk of ending up in negative equity. For example, you purchase a house for $300,000 borrowing the full amount and the property market falls by 10%, you now owe $300,000 for a property that is worth $270,000 – that’s a shortfall of $30,000 you need to recover.

As with all loans, make sure that you borrow within your means. Work out a budget, stick to it, and do not borrow more than you planned just because it is available. Also, consider the property market that you are buying into: Are the prices rising or falling?