Low Doc Loans – Could this be the end?

Low doc lending over the last 18 months has tightened significantly. Lenders are increasingly making it harder for self employed borrowers who do not have full financials to borrow. Some of the new changes of low doc loans are as follows;

  • 1 year BAS statements required for loans that borrow between 60 and 80 percent of the properties value (LVR 60 to 80%)
  • Cash out restrictions apply between the 60 and 80% LVR bracket and can also apply for loans less that 60% which is at the lenders discretion
  • The lender may want to look at trading and banking statements
  • Variety of product has decreased and interest rates are higher for LVRs between 60 and 80%

The new National Consumer Credit Protection (NCCP) laws require that mortgage brokers, banks and non banks will have to prove that  the borrow is suitable for a loan. This applies to both home loans for the principle place of residence and investment property loans.

Therefore, both brokers and lenders will require added documentation to ensure the borrower is suitable for a loan.

This does not mean that tax returns need to be completed but a broker or lender may need some or all of the following documents to ensure the borrower can afford to make the repayments regardless of loan to value ratio (LVR);

  • Minimum 1 year BAS statement
  • Bank trading statements for at least 12 months
  • Accountants letter
  • Projected income
  • A declared statement

No doc loans will no longer be available as the NCCP laws make it impossible to legally accept a loan application with out making financial checks.

However, the NCCP Act does not apply to low doc loans that apply to credit of a commercial nature. Low  doc commercial loans and no doc will still operate in this space

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Home Loan Lending Tightening Up!

Home loan lending is certainly tightening up. Yesterday RAMS announced that they are removing their 100% home loan product for risk management purposes.

With now only one reputable lender offering 100% home loans, it is going to become more difficult for those with out a deposit to get a mortgage.

Banks and other lenders also require home buyers to have a minimum 3% to 5% deposit sourced from genuine savings for a minimum of 3 months. Genuine savings can be in the form of bank deposits, shares, equity in another property and for some lenders rent paid over a 12 month period.

Not all lenders require genuine savings for a successful application but similarly to 100% home loans we will see a shift towards most lenders require savings of some sort before they will accept a potential borrower.

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Banks Revising Their Hardship Policy For Home Loans

mortgage-stressDue to the economic down turn, Australia’s major banks are revising their policy for home loan customers that are experiencing financial difficulty.

The banks are looking to extend their repayment holiday policy. This means that a customer experiencing financial hardship will not have to make mortgage repayments for the specified term. However, the intrest on the loan is capitalised (added to the loan) and repayments will commence as soon as the period has ended.

Commonealth Bank announced that they can provide an extra 6 month home loan repayment holiday which can now be extended up to 12 months. ANZ said they are looking at a similar offer.

Westpac said it also offers repayment holidays along with a range of measures that can help their customers for many years while NAB assess their customers on a case by case basis.

If you are experiencing financial hardship it is important to contact your lender early. They can implement measures that can save you from defaulting on your loan and help reduce mortgage stress.

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Mortgage Insurance – What Is It?

What is it?
Lenders mortgage insurance only protects the lender and not the borrower. In the event the borrower defaults on their mortgage repayments and the lender has to sell the property, mortgage insurance will cover the deficit between the sale price and the loan amount.

I get many questions from clients asking about lenders mortgage insurance (LMI) and I would like to clarify what it is and how it differs from lender to lender.

 

When Is Mortgage Insurance Paid?
Mortgage insurance is paid when a person borrows more than 80% of the properties value and they can fully declare their income. This means proving employment with evidence of latest pay slips and tax returns. Self employed persons will need to show a minimum of two years personal and company tax returns.

If applying for a low doc loan, where a person self declares their income without providing fincial evidence, then mortgage insurance kicks in between 60% and 80% of the properties value.

How Much Does it Cost?
Mortgage insurance is a one time only payment and is usually added to the loan. The cost of mortgage insurance becomes more expensive  as the borrowed amount against the properties value increases as well as the actual loan amount.

For example, assuming a property is worth $400,000 and Borrower A lends $340,000 (85% of the properties value) then they would pay significantly less than Borrower B if they borrow $380,000 or 95% of the properties value.

Also, if two borrowers were to lend 90% of a properties value and Borrower A’s property is worth $300,000 and Borrower B’s property is worth $500,000 then Borrower A will pay significantly less than Borrower B

Also, mortgage insurance can vary significantly from lender to lender. In some cases by as much as $5,000 . Ultimately, this may be the difference between choosing one lender over another.

To assess how much mortgage insurance you will pay from each lender it is advisable to get a quote from an experienced mortgage consultant who can quickly calculate the cost difference or you can simply contact us.

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Mortgage Lenders Tactics – How It Costs You!

mortgagetacticsI have been in the mortgage industry for a number of years now and the tactics lenders employ make me think twice about which are the most reputable.

I would like to share some of my insights on how the banks and other lenders manipulate interest rates to gain your business and cost you more in interest repayments than you initially thought when you signed on the dotted line.

I know the old premise of “buyer beware” and “it is all stated in the contract” but I do not think the tactics used are all that ethical

Below I have outlined some of the tactics you should be aware of before considering or signing a mortgage offer.

1. Introductory Interest Rates – This tactic attracts potential borrowers to the low initial rate compared to other lenders variable rates.  All to often these products offer a great interest rate for the first year or two but usually work out to be more expensive after the introductory period has ended. Switching loan products or refinancing after the introductory term has expired ends up being the same if not costing Also, if you forget to switch or refinance then you can expect to pay significantly more for your mortgage.

2. Promotional Products– Often lenders will offer a heavily discounted interest rate on a particular loan product for a limited time only to attract new business.  The products are sold as a full featured variable rate home loan – not an introductory rate. This tactic often works with brokers recommending and borrowers flocking to this product. After a year or so the lender increases the variable rate on that product and eventually borrowers end up paying the same rate as everyone else.

For example, a lender might offer a full featured home loan product at 0.25% less than all its competitors. Let us say they were offering a rate at 6.25% while the major banks and other lenders were offering rates around 6.50% to 6.60%. After a year so the lender increases the interest rate. Effectively, the borrower pays the same if not more for their current home loan compared to other lenders who consistently offer the same interest rate to the public.

3. Website Interest Rate Comparison – On many smaller lender websites I often see these lenders favourably compare their products to the major banks and other lenders. “Save over $70,000 compared to Commonwealth Banks (or any other banks) standard variable rate.” However, they do not mention other loan products offered by the bank that are more competitive than the banks standard variable rate. Personally, I do not know many borrowers who pay the standard rate for their home loans.

4. Delaying Interest Rate Rises – Back in 2007/08 when interest rates were rising, I noticed some lenders delayed passing on the interest rate rise by more than a month some times up to 3 months. You might think this is good but it unfairly conned potential borrowers to make enquiries and perhaps taking out a loan with this lender. Later they find out that their interest rate is no more competitive if not more expensive than other lenders products.

5. Delaying Interest Rate Cuts– Whenever there is an interest rate cut announced by the Reserve Bank of Australia I feel that 1 or 2 weeks is a fair time period for lenders to pass on the rate cut. After a 2 week period I feel the lender is  profiteering from their clients. I have heard that some lenders took  up to 2 months to pass on an interest rate cut.  For example, if you have a $300,000 home loan and your lender took 4 weeks to pass on a 0.25% interest rate cut you would effectively paying an extra $62. Multiply this by all their customers loans and that lender has made a healthy profit.

6. High Exit Fees – Most banks charge between $700 and $1,000 to exit the mortgage within 3 to 4 years. Some lenders charge a percentage of the original loan amount for exiting the loan with 5 years. This can be an expensive exercise if the loan is paid out or refinance. For example some lenders charged 1.5% exit fee during the first 5 years. On a $300,000 loan the exit fee would be $4,500. 

This does not cover all the tactics lenders use but are some of the ones I have noticed. If you have any other examples I would love to hear from you.

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