Over the past year there have been some dramatic changes to lending policies and products. It is quite difficult and confusing for most consumers to keep up to date with everything that has been going on let alone know which product and lender is best for them.
What has changed?
- Loan to value ratio (LVR): An LVR is the ratio of the loan amount to the property value. Basically you are limited to how much the lenders or banks will finance depending on the value of the property. Just over a year ago you were able to borrow up to 100% of the purchase amount excluding fees. If you were a First Home Buyer, your grant would usually cover the fees. So, technically you could have bought a house without any money down. Then when the Global Financial Crisis (GFC) hit we found lenders reducing the amount they would lend based on LVR. For example, we now only have a handful of lenders that will consider loan applications for a maximum of 95% of the house purchase price or value. Most lenders and banks will finance up to 90% of the cost exclusive of fees. Remember, if you are borrowing more than 80% of the security value then you will be up for Lenders Mortgage Insurance as well. This can run into the thousands. The more you can deposit, the more you will save in fees.
- Genuine Savings: Most lenders and banks now require proof of genuine savings if you are borrowing more than 80% of the property value. Genuine savings is demonstrated where supporting records in the name of the applicant(s); confirm the applicant(s) has accumulated a minimum of 5% of the purchase price or of the value of contract price and land by way of progressive and regular savings over a period of not less than three months prior to the time of application. Any lump sum payments or large deposits are excluded unless they can be clearly shown via documentary evidence to come from the sale of an appreciating asset (e.g. shares or real estate) that had been held prior to their disposal for a minimum of six months. If the 5% minimum savings was already held three months prior to the application, and there has been no subsequent progressive and regular savings since, the customer must be able to demonstrate that the savings have been held for six months prior to the application. Gifts from any source are excluded from genuine savings, as gifts do not in any way demonstrate the ability of an applicant to accumulate assets. Whilst the First Home Owners Grant remains as an acceptable source of borrower's contribution, it does not qualify as genuine savings.
Other exclusions from genuine savings:
- advances on wages/commission from an employer
- financing of a deposit
- builder discount/finance
- vendor discount/finance
- proceeds from sale of motor vehicles
- windfall gains
- one-off government payments (e.g. baby bonus, stimulus package payments)
Remember, this is a guide only and each lender does have its own definition of genuine savings. In most cases you need to hold the funds in a bank account for at least three months. The savings will need to be demonstrated at the time of application. In the past we were also able to show savings if the client had been renting for a period of time. This is not acceptable any longer.
Lo Doc/No Doc applications: In the past self employed applicants had an avenue of finance available to them without having to supply proof of income. In some respects this was quite risky as the borrower needed to estimate their income without the benefit of financials or tax returns. It was reported that some clients would over estimate their income to qualify for a loan, and not really have the capacity to repay the debt. The banks and lenders have really cracked down on this and now require BAS statements/and or transaction account statements to confirm the amount of income being declared. The maximum loan amount is 80% of the property value. We have only explained a few of the changes that have taken place. Your Finance Broker is still the best source of information on banks, lenders, policies and products.*Disclaimer:The advice in this article is of a general nature only. Seek the help of a professional advisor before making any financial decisions.
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