Applying for your first home loan can be a daunting task and I’m often amazed at the preconceptions people have about lending policy. So what do you need to know and what are the banks looking for?
Lending policy falls into two main areas – 1. Security and 2. Serviceability.Security means the type of property the bank will accept as worthy of lending money on. Serviceability relates to the income the banks will accept to service repayments on the loan. Bank’s lending policy is dynamic and can change considerably from lender to lender. Lenders are looking to lend money on property that they consider to have broad appeal and a broad market to sell to. This is because if a customer defaults on their loan, the lender can quickly and easily sell it on without incurring a cost. You can see that it would be much easier and faster to sell a two bedroom apartment in Bondi than an income producing cattle farm in Kalgoorlie. So banks categorise postcodes around Australia as well as types of property according to their risk.
So here are some typical policies relating to security that you might not know:· Lenders won’t lend on more than 25% of a development, or in some case, area. So if you’re buying into a development of 60 units, CBA for example will only lend on 15 of those units. So even if your application is really solid, it could get rejected on this basis alone. Sometimes whole areas are black balled by lenders, especially if they see there’s an oversupply of property.
· Australian lenders don’t like to lend in the CBD as they know that Australians like to live near the CBD but not in it. The CBD is also prone to oversupply.
· Lenders don’t like to take security that is less than 50 square metres of internal space; is part of a managed apartment’s arrangement or is a dual key dwelling. And if a lender does allow lending on the above property types, they might not lend as much or at as low a rate. Often Lenders Mortgage Insurance (LMI) will not allow lending on these types, which means the borrower is restricted to a maximum lend of 80% LVR.
Now for serviceability. There are lots of different policies on the type of income a bank will consider. So if you’re relying on more than your salary to service your loan you may need to look more specifically at the lenders who are most amenable to including the type of income you plan to include. If you’re a seasoned property investor you will be interested to know that while most lenders will only include 80% of rental income in your serviceability test, there are a few lenders who will take 100%. This could make a significant difference to the amount of money you can borrow.
Similarly, Centrelink payments, parental support, maternity leave payments – these are all viewed differently by different lenders.
So before you apply for a loan, talk to an experienced mortgage broker. They will know the ins and outs of lending policy across a number of lenders and a good broker will truly find the best product for you. Generally if you go directly to a bank you will be sold the product that makes the bank the most money, not the product that is in your best interests. At Calla Property we work closely with a number of excellent brokers so please contact us if you would like a referral.