Residential Home & Investment Lending – Over the last decade, residential lending and commercial lending has become even more regulated in Australia.
In the 1990’s regulators implemented the Uniform Consumer Code (UCCC). In 2009 the regulators implemented the National Consumer Credit Protection Act (NCCP).
Both the UCCC and the NCCP are designed to protect the Borrower; neither of these acts extends to business or commercial lending.
These acts place on obligation upon the lender and the mortgage broker to extend a duty of care to the borrower. This duty of care focuses on:
- The borrower not taking on any more debt that they can repay from their income sources.
- Ensuring that the borrower is not uncomfortable with the level of debt being proposed.
- The borrower and their requirements are being matched with the most suitable lending products.
- The entire lending practice is transparent.
This form of lending is characterised by:
- Verifying the required income to service the loan, (make at least the minimum repayments) is paramount and the biggest determinant of your borrowing power.
- The deposit required to purchase a property must come from one of the following:
- Genuine Savings
- Liquidation of assets – e.g. shares
- Equity in other real estates
- Equity in real estate owned by a guarantor
- Non-repayable gifts (generally from family)
- In very rare cases, the lender may be comfortable that the deposit has been borrowed via a personal loan or line of credit etc.
- A form of lending that is objective in nature and deals with present and historical facts, e.g. your current level of income and what you have earned historically.
- The lender will certainly take the first mortgage over the security offered to the lender. A lender may take a second mortgage over a security property offered by a guarantor.
- Interest rates for this type of lending are the cheapest in the market as historically residential lending has proven to be a lender’s least risky form of lending.
- Highly streamlined and IT reliant processing system. This type of work will generally take 4-5 weeks** from application to settlement, (completion of the loan transaction).
** Timeframe may vary greatly from application to application due to the level of complexity and unexpected occurrences.
- The system of IT “Credit Scoring” is commonplace in residential lending. That is, depending on how you answer questions within the lender’s application and will determine the points score of your application. Been in your job 3 years? The computer will give you points. The end point score will determine whether your application is approved or declined.
On occasion, if an application is determined due to points score, there will be human intervention to overturn the decline decision.
- The vast majority of lenders are now charging an interest rate premium for investment lending as opposed to owner-occupied lending. This premium averages approximately 0.27%. Some banks are also charging an interest rate premium on interest only loans, i.e. loans where the borrower is solely paying back the interest accrued on the loan. These interest rate premiums are a
- Your employment status can have a bearing on the success of your loan application. Stability of employment is a real advantage.
Various Employment Classifications
- Full time, not on probation. This is the most favourable form of employment when seeking finance. Lenders are reluctant to lend money to applicants that are on a probation and especially so if the bank is lending greater than 80% of the value of the property.
- Permanent Part time, not on probation. Again, lenders are comfortable with this form of employment as there is a degree of permanency.
- The least desirable form of employment is the casual form. As far as the lender is concerned there is no permanency and you could be out of a job tomorrow. Believe us, lenders do not recognise the term ‘permanent casual’. The vast majority of our lenders would like to see casual employees in their job for approximately twelve months before they would consider lending to them.
- Contract employment. The lender will want to know the term of the contract and whether the applicant has had previous employment contracts with this employer. The Lender will want to know if the appointment has had other employment contracts with other employers in the same field.
- Employment via labour hire organisations. Again, the lender will want to see a continuity of employment, the stability of employment and consistency of income. Generally, the lender will want your last two years tax returns.
- Commission only employment. The lender will consider you as self-employed and would require the last two complete years tax returns.
- Self Employed. Historically, for one reason or another, applicants who are self-employed have the greatest difficulty obtaining finance. It is probably due to the inconsistency of income that the self-employed experience. Generally, the lender will want the last two years tax returns for the individual and the business. The lender may also request BAS statements (GST). If halfway through the tax year, the lender may request interim financials (profit & loss/balance sheet) prepared by an accountant. Generally, the lender will average out the last two years income. Although if the most recent year is vastly superior to the previous year, the lender may only add 20% to the previous year.
We do have lenders that will solely assess the most recent year, regardless of how much better than the previous year. Self-employees who have difficulty proving their income may qualify for an alt doc loan or specialist lending.
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