We often hear non-residents claim that home loans in Australia take longer to process due to our elaborate verification processes.
Understandably, home loan application processes are different in every country due to specific rules and regulations. However, they do share the same general principles and processes.
So how does borrowing in Australia stack up to the rest of the world? Let’s compare home loans in China, India, the UK and the US.
Strict Government Regulations For Loans In China
How can locals apply for home loans in China?
In China, self-employed borrowers only need to provide financial statements and tax returns for one year only.
Chinese borrowers also prefer to pay in cash and borrow about 50% for a home loan since the savings rate is relatively higher there. The savings rate is over 50% and in 2012 it was recorded as the highest in the world by the International Monetary Fund (IMF).
Why is a larger down payment required in China?
Buyers are also required by the government to put at least 30% to 40% of the property value as down payment for their first home and 50% for investment properties to reduce the risk of defaulters. This is done because the banks there prefer to minimise their risk as much as possible.
Another difference is the maximum home loan period is only 30 years whereas Australian mortgages can go up to 40 years.
What about foreign investors?
It is more difficult for non-residents to apply for a mortgage in China. You need to have lived in the country for at least two years, worked for one year and have not applied for a mortgage before.
Foreigners also need to provide a local guarantor before purchasing any property. Even local borrowers, particularly businesses, need to provide multiple guarantors for a commercial loan.
Indian Borrowers Prefer Banks For Home Loans
How do Indians apply for home loans?
One of the first things you’ll notice about mortgages in India is that mortgage brokers are not very common and individuals contact banks directly.
The loan application process is less electronic with borrowers applying in person and banks conducting meetings with borrowers within two or three days of submitting their home loan application.
What documentation is required for income verification in India?
Another difference is self-employed borrowers need to provide up to three years of tax returns compared to only two years of tax returns in Australia.
Salary employees, such as Pay As You Go (PAYG) employees, must also provide their last three payslips and other country specific forms. They also do not use group certificates in India.
Does India have a credit reporting system?
India also has its own form of credit history tracking known as CIBIL (Credit Information Bureau India Limited) which functions just as Equifax (previously Veda) does in Australia.
UK Mortgages Are Mostly Similar To Australia
What are the common mortgage terms in the UK?
Banks in the UK prefer to use the term HLC or Higher Lending Charge. This was previously called MIG or Mortgage Indemnity Guarantee.
It is similar to what LMI (Lenders Mortgage Insurance) is in Australia. The difference is that in Australia, LMI is charged for loans over 80% of the property value whereas HLC can be charged for loans over 75% of the property value.
Buy To Let Mortgages compared to Investment Loans?
In the UK a loan for an investment property is called a Buy To Let Mortgage whereas in Australia this is called an Investment Loan. The UK has restrictive lending policies for Buy To Let Mortgages while in Australia the banks are only slightly more conservative and typically offer the same interest rates.
How strict are the mortgage regulations in the UK?
The regulations on mortgages in the UK are similar to those in Australia. Mortgage brokers are required to provide borrowers with a KFI or Key Facts Illustration which compares different loan products in terms of interest rates, fees, etc.
Does the UK government help first home buyers?
While the British government does not have a First Home Owners Grant (FHOG) for first home buyers, it does have schemes such as the Help To Buy program in which they provide loans up to 20% of the property value interest-free for five years.
How is identity verification done in the UK?
ID verification in the UK will require you to provide your National Insurance number along with three years of utility or council tax bills for proof of your residency. UK borrowers also have the option to order a report known as a building survey which checks for any faults in the property.
The Yanks Do Things A Little Differently
What is a FICO score?
Credit scoring is also a major part of the home loan application process in the USA, with the FICO score being the most common model used. This uses your payment history, credit utilisation, length of credit history, types of credit used and recent enquiries to calculate a three digit figure ranging from 300 to 850.
Is mortgage insurance paid annually in the USA?
Mortgage insurance, commonly referred to as PMI or Private Mortgage Insurance, is paid for loans that are more than 80% LTV (Loan To Value), just like in Australia.
Unlike LMI, PMI is usually about 0.3% to 1.15% of the original loan amount and is paid on an annual basis. However, PMI is also tax deductible in the USA unlike LMI in Australia.
Similarly, American lenders require transcripts of tax returns paid to the IRS (Internal Revenue Service) just like our lenders ask for an Notice of Assessment (NOA) from the Australian Tax Office. Identity verification is done with the borrower’s Social Security Number which is unique to America.
What is a Good Faith Estimate?
As in Australia and the UK, American mortgage brokers and lenders also need to provide borrowers with comparison of different loan products. This is known as a Good Faith Estimate or GFE and is applied within three days of applying for a home loan.
Does the USA have grants for first home buyers?
The American government assists first home buyers through the FHA or Federal Housing Administration which allows them to get a home loan with a minimal down payment of 3% to 5%. This is done by providing private lenders with mortgage insurance so that the loans can be approved.
Do American borrowers prefer fixed rates or variable rates?
A common trend among America borrowers is that the majority of them prefer home loans at long term fixed rates.
Australians, on the other hand, prefer variable rates, known as Adjustable Rate Mortgages (ARMs) in the US.
How does the American “mortgage point” system work?
The most unique aspect of the American mortgage system is the presence of “mortgage points”. Each point refers to 1% of the total loan amount. For example, 1 point would be worth $1000 for a $100,000 mortgage.
This means that in the USA loan products come with an interest rate and a point e.g. 6.75% and 4.5 points, 7% and 2 points or 7.75% and 0 points.
This system allows borrowers to “buy” discount points at the rate of 1% of the property value which then decreases their interest rate by 0.25%. This works to reduce their loan repayments for a one time payment.
For example, if you had a $100,000 mortgage at 5%, then your monthly repayment would be $500. Now if you bought 2 discount points, this would decrease your rate by 0.5%. Now your repayment would be $400 however you would have to pay $2,000 for this.
This system allows far more flexibility for borrowers in financing their home loans but it can also make it more complicated.
No points mortgages are also available in the US, however these will also have higher rates.
So how different are Australians home loans?
As you can see, while mortgage process are very similar in different parts of the world, its the specific terms and jargon that usually change between nations.
China has some of the strictest home loan regulations in the world. Unlike Australia, they do not encourage foreigners to buy property and economists point out that banks there prefer to have more security hence the need for larger deposits.
Unlike Australia, Indian home loans are usually processed by the banks directly and most of the work is done manually instead of digitally. However, they do have similar regulations and credit reporting systems as Australia which keeps the industry running smoothly.
In the case of the UK, their home loan processes are quite similar although they do have different programs to help first home buyers.
The US mortgage system is also similar to Australia although the use of the discount points to reduce interest rates is unique. Unlike Australian borrowers, American borrowers prefer to take out fixed rate loans rather than variable rate options.