Home loan requirements every borrower needs to know
Australian banks and lenders mortgage insurers have specific lending criteria that they use to assess home loan applications.
If your situation falls outside of their guidelines, your application is likely to be declined.
However, there are some lenders that will bend the criteria and consider your application based on its merits, not just a black and white approach.
Changes to lending policies due to COVID-19
Due to the COVID-19 pandemic, there have been significant changes to the lending policies of banks. To learn more, you can call our mortgage brokers at 1300 889 743 or fill in our online enquiry form.
The type of borrowers banks prefer
If you need help with a loan, call us
- Most of our mortgage brokers are ex-bank credit managers.
- We specialise in getting tough loans approved.
- You’ll need to know what LVR means to use this guide.
- This page contains standard lending policy but we have access to specialised lenders that can consider making exceptions.
Please call us on 1300 889 743 or fill in our free assessment form and our staff will help you to get approved for a home loan.
- Natural person (over the age of 18).
- Trustee of a Trust.
- Any multiple or combination of the above borrowers.
- Limited liability companies.
- Minors (under the age of 18).
Case by case borrowers
The following aren’t considered to be traditional borrowers but they can still get a home loan by building a strong case with the right lender:
- Borrowers of convenience (borrowers that receive no benefit from the loan).
- Non-residents such as people living outside of Australia or someone living in Australia but is a temporary or permanent resident rather than a citizen.
Loans to companies and trusts
For company loans, all directors and shareholders (excluding ‘notional directors’) must provide unconditional joint and several personal guarantees.
In the case of a trust, where the trustee is a company, directors and shareholders are required to provide unconditional joint and several guarantees, as mentioned above.
The trustee of the trust must always be the borrower in its own right and as trustee for the trust. E.g. Smith & Co Pty Ltd IIOR & ATF The Smith Family Trust.
Hybrid trusts aren’t generally accepted for home loan applications (some exceptions may apply).
In some cases, the directors of the trustee company may be the borrower, whilst the trust is the mortgagor.
These applications are assessed on their merits.
Borrowers of convenience
A borrower of convenience is defined as a borrower that’s added to the loan application to provide serviceability and/or security but doesn’t receive a tangible benefit from the loan transaction.
Borrowers must have a beneficial interest in the loan transaction either by way of joint ownership of the security or if the borrowers are in a de facto or marital relationship.
It’s not acceptable for a person to be joined in a loan simply to provide income support for servicing or to provide added security for another party to purchase a property.
The exception to this is with guarantor home loan applications.
For the purposes of this policy, a non-resident is deemed to be any person without permanent residency status in Australia, and/or any person who resides and is employed in another country.
Australian citizens living and working overseas (Australian expats) are considered residents of Australia so they’re not treated as non-resident by the banks.
Similarly, New Zealand citizens living and working in New Zealand or permanent residents of New Zealand are considered residents of Australia.
The maximum LVR and Loan Amount that you can borrow:
- NZ citizens living in NZ: Borrow up to 90%.
- Other non-residents: Borrowing up to 70% LVR is available.
Borrowers must be high net worth or with net assets in excess of $500,000.
Where one borrower is a citizen or permanent resident of Australia or New Zealand, and the other borrower is a non-resident as per the above definition, any proposal will be assessed under normal policy and not under the non-resident policy above.
In situations where non-rental income can’t be adequately verified, 100% of the gross market rental income for the security property must be sufficient to cover the proposed mortgage loan instalments
This is calculated at the current assessment interest rate.
Where required, written evidence that Foreign Investment Review Board approval has been granted, must be supplied.
Guarantors are required to complete a full application form including personal details, financial position, employment details and sign the lender’s Privacy Act declaration.
Where guarantor income is required to service the proposed debt, standard employment and income policies apply, including income and employment verification requirements.
For family pledge home loans, the guarantor can’t be a pensioner using their owner occupied property as security for the loan.
Note that some lenders don’t have this requirement.
Borrowers who have saved a deposit are generally better prepared to deal with any difficult financial circumstances that may arise.
They have proven their ability to manage their finances responsibly and live within their means.
Genuine savings needs to be evidenced in the following circumstances:
- Home or investment loans up to 90% LVR: No genuine savings required for 90% home or investment loans.
- Home loan over 90% LVR: 5% genuine savings required for 95% mortgages or above.
- Investment loan over 90% LVR: 10% genuine savings required for 95% investment loans or above.
- Low doc loan: 20% genuine savings required.
- No genuine savings loan: You won’t need to provide genuine savings and you can borrow at any LVR (note that this product is only available from some lenders).
Note that some lenders require genuine savings for loans above 80% LVR. Please refer to your mortgage broker for the specific policies of a particular lender.
Must be held in the borrower’s name and include:
- Funds held or accumulated in savings accounts for 3 months or more, or
- Funds saved in First Home Saver Accounts, or
- Equity in residential property, or
- Proceeds from the sale of a property, or
- Term deposits held for 3 months or more, or
- Shares held for no less than the last 3 months, or
- A rental history showing payments on time for 3 – 12 months, or
- Lenders may allow a gift / inheritance from your parents or a loved one as a deposit.
These don’t contribute towards the 5% genuine savings requirement:
- Gifts or inheritance (see ‘Genuine savings’ above).
- Proposed savings plans or Rental Purchase Plans of any kind.
- Proceeds from a property sale
- Sale of assets (other than real estate) such as a car.
- First Home Owners Grant (FHOG).
- Funds held in company / business accounts.
- The proceeds of a personal loan.
- Builder’s or vendor’s rebate / incentive.
- Although you still need a deposit, some lenders will accept rent as genuine savings.
- Some lenders will accept a credit card that you can use to “top up” any shortfall in your deposit but you still need to have at least 5% in genuine savings anyway.
Savings plans and rental purchase plans
Savings plans allow the borrower to save the deposit on a home, after approval of a mortgage.
Similarly, rental purchase type arrangements enable the borrower to save the deposit whilst occupying the security.
These rental purchase arrangements are commonly referred to as wraps, vendor finance or rent to buy schemes.
None of these plans are acceptable to lenders mortgage insurers which means LVRs are restricted to 80% of the property value or less.
Borrowers may still get approval if they can provide evidence of genuine savings outside of the savings plan.
Employment and income
Acceptable employment statuses are listed below.
- Minimum 2 years continuous employment in the same industry or minimum 12 months with current employer.
- Where the borrower is undergoing a probation period, the financial position of the borrower and the strength of the application are key.
- Minimum 12 months in current employment.
- Where the borrower’s only source of income is from casual employment, the loan application will be assessed on its merits, as well as the strength of the borrower’s overall position.
- Some lenders will consider as little as a 3 month history in a casual position.
- At least 2 financial years trading in the current business.
- Where a borrower only has 12 months trading in their current business and 2 years in previous employment, within similar occupation/field, the application may be considered by the lender, based on the borrower’s self employment circumstances and the overall strength of the application.
- Minimum 12 months in current employment.
- There are some lenders that can consider an exception to this lending criteria.
Acceptable income types
Salary and wages
100% of income will be accepted if length of employment criteria is met.
100% may be used to assist in serviceability if payment is regular and can be confirmed in writing that overtime hours are a condition of employment. If written confirmation is not available, evidence of overtime over the past 2 years will be required.
Overtime (essential services)
Where borrowers’ employment is in the essential services industry (e.g. ambulance, police service, nursing, etc), written confirmation isn’t required.
100% may be used only if it’s a condition of employment and is an industry standard.
80% of gross rental income to be added to gross salary/wage income (only 50% of gross rental income accepted for high density and/or inner city apartments).
Where a significant portion of a borrower’s income is derived from rental income, the application may be considered too rent-reliant.
Tax deductible investment loan interest may be added back to net income (after tax).
Investment income (interest, dividends)
80% of income as demonstrated on tax returns – income level must be evidenced over the past 2 years.
Social security benefits / government pension
100% accepted where the payments are considered as permanent for the next 5 years (unemployment benefit/sickness benefits are not acceptable).
100% may be added to the gross taxable income.
$5,000 p.a. may be added to gross taxable income.
100% accepted if the maintenance agreement is registered with the Child Support Agency, 6 months’ consistent payments can be evidenced via the borrower’s bank account statements and the payments are considered as permanent for the next 5 years.
Borrowers must produce the last 2 years business and personal tax returns.
Income evidence must demonstrate consistent income levels for the years under review, although it wouldn’t be unrealistic for each year to reflect an increase of up to 20% in the net profit.
Where taxable income has increased over the last two years by less than or equal to 20%, the latest year’s income will be used.
Where taxable income has increased over the last two years by more than 20%, the maximum of 120% of the previous year’s income will be used instead.
100% of depreciation but only up to 20% of business net profit may be added back to after-tax income for servicing calculations.
Contributions in excess of the compulsory minimum percentage of gross annual income may be added back to the taxable income.
Stipend income and fringe benefits
Certain professionals in essential services like health and medicine may receive allowances for basic living expenses like housing.
Some lenders will use up to 80% of this income of stipend or fringe benefits when assessing your borrowing power.
Our best lender will use up to 100%.
Unacceptable income types
The following income sources aren’t acceptable:
- Workers compensation (with some exceptions).
- Income from boarders. However, one of our lenders will accept 100% of your child’s rent when assessing your income.
- All other forms of income not listed in the above “Acceptable income types” list.
Serviceability is the lenders assessment of your capacity to afford the loan.
Each lender has their own method of assessing serviceability but there are typically two main methods used:
- Net Disposable Income (NDI):
This method is used to assess your ability to meet regular fixed financial commitments.
It calculates the funds left over (on a monthly or annual basis) after tax, living expenses and fixed commitments have been deducted from the borrowers gross income. This method is also known as the Uncommitted Monthly Income (UMI) method, where the minimum surplus ranges from $1 per month to 25% of the borrowers total monthly fixed commitments.
- Debt Service Ratio (DSR):
This method calculates the percentage of a customers gross income that is used to service a debt.
As a general rule, home loans with a DSR greater than 50% are declined.
Using the borrowing power calculator (servicing calculator), proposed debt repayments are calculated at the average standard variable rate of the four major banks or the lender’s Standard Variable Rate (SVR), whichever is higher.
On top of this, there is an interest rate buffer of an additional 2.25% to cover interest rate movements and / or unexpected expenses.
As a minimum, the assessment rate must be 7.25% to ensure that people do not borrow exessively while interest rates are low.
Joint income and commitments
Where the borrowers have existing joint commitments with parties who aren’t included in the loan application, 100% of the existing commitment is to be used in calculating serviceability for the new loan.
If the borrowers share a positive income source, such as rental income, with parties not included in the subject transaction, the borrower’s tax return or certificate of title is used to ascertain the percentage of ownership.
This percentage will then be applied to the gross joint income in order to determine the amount used in calculating serviceability for the new loan.
If you have a jointly-owned property with someone who’s not applying for your current loan, the bank will use 100% of the repayments on your investment loan but only 50% of your rent income.
Some banks can consider an exception to this lending criteria if you can prove that the other person that’s liable for the debt is paying a share of the repayments.
For self-employed borrowers or companies, there may be some expenses that can be added back to your net income, for the purposes of assessing debt serviceability.
- Income/salaries of directors (where not already included in income calculations).
- Interest paid on debt being refinanced.
- Business depreciation (not exceeding 20% of business taxable income).
- Superannuation contributions in excess of the compulsory minimum percentage of gross annual income.
- Non-recurring expenses (confirmation from borrower’s accountant required).
Where the borrower is purchasing an investment property and is currently residing with family or friends, either rent-free or at an unusually low cost, a notional rental expense of $150.00 per week ($650 per month) may be included as an existing financial commitment when determining serviceability.
However, this is ultimately at the lender’s discretion.
This is to manage the potential risk that the borrower may move out of their current residence or move into their investment property later on.
This notional rent expense won’t apply to loans for the acquisition of vacant land.
Sale of the security property is the alternative means of clearing the loan debt, should the borrower/s not be able to fulfil their repayment obligations.
Therefore, the security must be readily saleable to avoid a protracted selling period.
As a general rule, this means that the property must be in a high demand location, in good condition, have wide appeal to potential buyers and have few or no restrictions on it being sold.
This includes covenants, caveats, lease of life or, if it’s a company title, it must not have rules saying “new buyer must be approved by the other owners,” etc.
The security location guide identifies property locations by postcode for a range of home loan types, with varying loan amounts.
The postcodes are broken up into groups based on population figures obtained from the most recent census data, as well as other factors including the geographic spread of the postcode, sales activity and home prices.
Despite this, some lenders still offer 95% LVR loans for properties located anywhere in Australia.
However, this depends on the level of activity in the market and whether there are sufficient comparable sales to accurately assess the market value of the property.
Security property requirements
- Must be zoned for residential use.
- A house, villa, home unit, townhouse, duplex, or vacant land.
- Power is connected.
- Must have direct vehicle access and not via another private property.
- At least 50m² in living area, excluding balconies and car space (for good quality properties located in a desirable and high demand metropolitan location, the minimum living area is 40 m²).
- Other security types may be accepted, subject to limitations.
Readily saleable with no adverse features such as:
- Affected by any government or state planning scheme.
- In need of repair or has been poorly-maintained.
- Reduced marketability due to location.
Acceptable land tenures include:
- Freehold including strata, group and community titles (community title properties in NSW and VIC are only acceptable if the development has been fully-completed).
- Crown Leasehold land.
- Residential area rights and residence licences (Victoria only).
Where a borrower/guarantor is providing security consisting of multiple properties, located within a concentrated area, the lender will limit the exposure to the borrower/s to a maximum of 4 units or 25% of a development, whichever is lower.
Security policy exceptions
Where a loan is secured by typically higher risk security types, the application may be considered based on the merits and strength of the borrower’s overall position.
High risk security types include:
- Properties located in places where the known flood height level is higher than the floor level.
- Multiple occupancy security (more than two dwellings on the title).
- Display homes.
- Properties located on an island, without sealed road connection to mainland. E.g. Russell Island in QLD.
- Property boundary is located within 50 metres of high voltage transmission lines (possibly acceptable at a lower LVR).
- Part of a development that has been converted from another usage.
- Vacant Land exceeding 2.2 hectares (5 acres /22,000 m²).
- Studio apartment or bed-sitter (no separate bedroom).
- Serviced apartments.
- Properties that are unique or have restrictive usage.
- Bushfire-affected properties.
- Boarding house/hostels can be considered depending on whether the property is classed as commercial or residential.
These properties present a higher risk to the lender due to their reduced saleability and limited market appeal.
In some cases, these properties may also have fluctuating values.
Unacceptable residential security properties
- Income-producing rural properties such as commercial farms.
- Properties designed, zoned, or used for commercial purposes (excluding residential home units in a commercially-zoned development).
- Properties to be constructed by an owner-builder (in whole or part), where the LVR exceeds 50% of the cost price or valuation (whichever is lower), or construction by an owner builder, completed under the “Home Building System,” where the LVR exceeds 75%, are a high risk (still considered on a case by case basis).
- Crown Land (other than the ACT).
- Leasehold properties (other than Crown Land in the ACT).
- Purple Title (W.A.), or Moiety Title (S.A.).
- Company Share Title (VIC).
- Improved site with land size larger than 40 hectares.
- Under a “timeshare” arrangement such as a holiday home.
- Land subject to licence to occupy.
- Limited Title (any defects).
- Mobile or temporary homes (you can borrow against the land value only).
- Land/improvements contaminated.
- Properties with “life lease” covenant on the title.
- A strata title home unit less than 40 m² (meters squared).
- Properties subject to the Western Lands Act.
- Properties subject to mines subsidence. Note: It is still possible to borrow from some lenders if you obtain a certificate from the Mine Subsidence Board (MSB).
Rural residential and rural properties as security
Rural residential properties must:
- Have water and power connected (tank water & bore water is acceptable, however, solar powered properties are generally not).
- Not be income-producing.
Although income-producing rural properties will normally need to be assessed by a commercial credit department, you may be able to finance the purchase of a hobby farm or rural property up to 100 hectares as a residential loan at a much cheaper interest rate.
It largely comes down to the potential income-producing potential of the land and whether you’re relying on that income to pay the loan.
Check out the hobby farms page for more information.
The other thing to consider is the many types of local council zoning laws that may apply to a rural property.
- A property with residential improvements between 2.2 hectares and 10 hectares in size is considered rural-residential.
- A property with residential improvements between 10 hectares and 40 hectares is considered rural.
The maximum loan amount and LVR per security are limited in the following ways:
- 2.2 to 10 hectares (rural residential): Max 95% LVR for Category 1, 2 or 3 postcode areas.
- 10 up to 50 hectares (rural): Max 95% LVR for Category 1, 2 or 3 postcode areas.
- 50 up to 60 hectares (Rural): Max 80 LVR for Category 1, 2 or 3 postcode areas.
- 60 up to 100 hectares (Rural): Max 70-80% LVR for Category 1, 2 or 3 postcode areas.
- Please refer to our rural property page for information on how to finance acreages.
Where your property type may be traditionally unacceptable, but your application is strong, some lenders may still approve you.
However, valuations must not include any non-residential improvements such as dams, livestock pens, barns, orchards, stables, etc.
The reason is that these improvements will be seen as commercial in nature by the valuer.
Vacant land as security
This is a form of security where the land is devoid of any improvements.
The vacant unimproved land may either be zoned residential, rural-residential or rural.
Security in locations other than Category 1, 2 and 3 postcodes may be eligible for approval, subject to the overall strength of the home loan application.
The security must conform to the following:
- Land size not to exceed 2.2 hectares (5 acres/22,000 m²), although one of our lenders can consider larger land sizes up to 100 ha.
- The property must have all-weather road access.
- Electricity must be connected to property (power poles less than 200 meters from the boundary are acceptable and solar panels are accepted in some cases).
Stratum title units
May be considered up to a maximum LVR of 95% (depending on strength of application).
Inner city apartments
A high density apartment is a strata titled home unit or apartment located within a postcode defined as a High Density Location, per the postcode location guide, and part of a development comprising more than 35 apartments.
The policy for this varies depending on the lender.
Some lenders have no restrictions on inner city apartments.
The following conditions and restrictions apply to these types of security:
- Maximum LVR of 95% may be considered.
- Valuation should include comparable sales outside the development as well as details of any re-sales within the development.
- Security must be in a prime location.
- LVR and concentration restrictions may apply to individual developments (some developments are known to lenders and are specifically approved or listed as unacceptable security).
- Up to 50% of gross rental accepted for servicing.
- A minimum floor size of 50 m² (40 m² in high demand locations) in living area, excluding balconies and car space.
- Should be a “high net worth” borrower with net assets over $500,000.
- Houses within high density locations are exempt from this policy, as are home unit developments comprising of a total of 35 apartments or less.
- Each proposal will be considered by the lender on it’s individual merit.
The following security types and borrowers are not acceptable:
- Loans to first home buyers property purchasers.
- Serviced apartments or apartments that are subject to a management agreement.
- Strata title hotel / motel room (exceptions apply to serviced apartments).
Builders often construct a home for display purposes and subsequently offer the home for sale to a property investor on a leaseback arrangement, often at above market rental rates.
In most cases, the lender would regard such an arrangement as a standard residential investment lease and would assess rental income at normal market rates.
If the property is situated within a designated “exhibition village” and the active life of that village has more than 6 months to run, approval is only available in the following circumstances:
- There’s no reliance on rental income from the security, or
- A bank (or similarly recognised) guarantee is provided to the lender by or on behalf of the borrower, for an amount equal to the total rent payable from the date of commencement of the loan until the date that the exhibition village will cease operation.
This term is used to describe a range of pre-fabricated kit style dwellings, which, once properly erected and connected to power and water, are not significantly different to a traditional dwelling.
For mortgage lending purposes, the construction of a pre-fabricated dwelling must be undertaken by a qualified and licensed builder under the lender’s normal progress payments and progress inspection criteria.
Mobile homes of any type aren’t an acceptable security for a home loan.
Funds aren’t available until the house has been completed and a certificate of occupancy has been issued by the council.
This may cause problems for the borrower and builder if it doesn’t match their agreed payment schedule/plan.
Finance may be available but only when the house has been installed onto the new location, all services are connected, renovations are completed and a certificate of occupancy has been issued by council.
An on-completion inspection and report from a qualified valuer must confirm that the house has been installed and that the property meets the acceptable security criteria.
Note that the only funds available prior to the house being complete are those secured entirely by the value of the land.
House and land packages
Lenders will consider new house and land packages subject to the following:
- Valuers are required to comment on the fact that the security is a house and land package and must document details of any rebates and/or incentives.
- Where builder rebates and/or incentives are noted, the value of the rebate and/or incentive will be discounted from the purchase price.
A second mortgage is where a borrower obtains an additional loan using a property that already has an existing mortgage, as security.
A second mortgage can be obtained from the first mortgagee or from another lender that accepts second mortgage security.
Lenders will consider applications for home loans secured by a second mortgage as security only if:
- They hold the first registered mortgage.
- The second mortgage is additional security for a home loan for which the lender also holds another security property with a first mortage.
Major lenders are unable to finance a second mortgage behind another lender, on their own. This is because a second mortgagee is susceptible to a high amount risk.
Where the borrower doesn’t repay both mortgages, the first mortgagee controls the recovery process for the property and has first rights to recover their funds.
Additional legal costs may also be incurred during recovery.
This means that the second mortgagee may not be able to recover their loan in its entirety.
Off the market transactions
This is where a property is sold by the vendor and not by a registered real estate agent.
These sales may include advantageous/favourable purchases to a family member at a discounted price, or where a vendor is selling the property at a discounted price to a person to whom he/she is indebted.
Lenders refer to this as a “non-arms length transaction.”
In those cases, the valuation can be used instead of the purchase price, for the purposes of calculating the LVR and the LMI premium (subject to LMI approval). Note that the following policy will apply:
- Maximum 90% LVR (based on valuation).
- Genuine savings are still required as per normal policy.
- The borrower must confirm the details of the transaction in writing.
- The lender appointed valuer must note the purchase price and details of the transaction in his/her comments.
- Each loan will be assessed on a case by case basis.
This is where the lender has more than one property as security for the loan.
The properties are all collateral for a single loan that often has multiple loan accounts.
This is generally easier to setup than multiple loans secured by multiple properties.
However, it can be very difficult to sell a property or increase the loan amount.
Where you wish to do so, usually all properties need to be valued and the lenders credit department must approve the variation.
In the event that you’re unable to pay the loan, the lender may have a greater level of control over your assets.
All cross-collateralised applications must meet the following requirements:
- Security property must be common to all loans under the cross-collateralised structure.
- Each mortgagor under the cross-collateralised structure must be either a debtor or guarantor.
- Any guarantor on any loan within the cross-collateralised structure will be required to guarantee all loans within the cross-collateralised structure.
- In the case of a third party loan where a borrower is not a mortgagor, that borrower must have a direct relationship to a mortgagor, with respect to control such as through a company structure, where a mortgagor is a director.
New properties/new units
Newly-built properties require an additional assessment, particularly in QLD.
This is to ensure that the sale price is accurate and to reduce the possibility of fraud.
The following types of transactions may require additional supporting documents, at the discretion of the credit manager:
- New units / townhouses or houses.
- Off the plan purchases.
- Where the sale is without the intervention of an agent such as a related vendor or for off the market transactions.
- Sales where the buyer is in a different state to that of the security property.
For new properties sold in QLD, a copy of the Section 27c Certificate may be required.
Did you know we can order free upfront valuations with several of our banks?
The lender may require a valuation of the security property, depending on their guidelines and the overall risk of the proposal.
The lenders system will determine if a valuation is required and, if so, what type of valuation will be ordered.
The types of valuations commonly used are:
- Contract of sale (no valuation required because the contract price is accepted as market value).
- AVM (an automated valuation only accepted if the property meets particular criteria).
- Desktop valuation (automated/staff assisted valuation method).
- Restricted access/drive by valuation.
- Short form valuation (full inspection).
- Long form valuation (full inspection typically used for luxury properties).
When determining the need for a valuation, the lenders system will take any possible high risk factors into account.
These risk factors generally include:
- New properties.
- Non-metro locations / high density locations / unit blocks or properties with known issues.
- >80% Loan to Valuation Ratio (LVR).
- Loan applications that have a failed credit score or that do not have a good credit score.
For a valuation to be accepted by the lender, it must include the following components:
- Must be less than 90 days old.
- Must provide at least three acceptable (within 15% of the valuation) and recent (within 6 months) comparable sales of similar properties, ideally from outside of the same development.
- The valuation of a security is not to include any component for GST cost.
- The valuer must state that the security property is suitable for mortgage lending purposes and may be relied upon by the lender and their Lenders Mortgage Insurance provider.
- Must be based on existing condition of property and/or the on completion value of proposed construction.
- A separate value should be provided for the land and improvements, except where strata title properties are involved.
- The valuer should comment on the demand for similar properties in the current real estate market. Care is to be taken in markets with a low turnover such as small country towns.
The “Loan to Value Ratio” (LVR) is one of the major indicators of risk and a primary consideration that banks take into account.
The LVR is the loan amount as a percentage of the property valuation.
The maximum LVRs referred to in this policy are considered to be the preferred LVRs for many lenders.
LVRs may vary by product, loan purpose and security location.
They can also depending on the credit officer’s discretion:
- Purchases: The LVR is determined on the valuation of the property or the purchase price, whichever is lower.
- Refinances: The LVR is the loan amount as a percentage of the valuation only.
- Construction loans: The LVR is determined on either of the cost (land value plus tender) or the on-completion valuation, whichever is lower.
It should be noted that the lender may choose to limit the LVR of the loan based on the strength of application and the loan type.
The maximum base LVR is 95%, or up to 97% including capitalised LMI.
Keep in mind that some lenders allow LMI to be capitalised above 97% LVR.
The only exception to this is when you’re using a guarantor.
You’re entitled to borrow 100% LVR when using your parents property as additional security for the loan.
Maximum loan amounts
Lenders have preferred maximum loan amounts for certain types of borrowers.
Loan amount limits apply on a “per security” basis and vary based on loan product, loan purpose or security location.
It should be noted that the lender can choose to limit the proposed loan amount for loans that pose a higher risk.
- 95% LVR: $750,000 (some lenders consider up to $2,500,000).
- 90% LVR: $850,000 (some lenders consider up to $2,500,000).
- 80% LVR: $1,000,000 (some lenders consider up to $4,000,000).
- 70% LVR: $2,000,000 (some lenders consider up to $6,000,000).
- 60% LVR: $2,500,000 (Unlimited loan sizes are available from lenders that don’t have exposure limits).
The maximum exposure (total loans to one borrower or group of borrowers) preferred by lenders and mortgage insurers is $2.5 million.
Exposures above this amount may be considered on a case-by-case basis.
It should be noted that lenders and mortgage insurers are often conservative when assessing loans to borrowers with a total exposure over $1 million.
In some cases, we can get around this problem by spreading the loans between lenders to keep their exposure with any one lender or LMI provider below $1 million for as long as possible and ultimately below $2.5 million.
This allows serious property investors to grow their portfolio rapidly.
An investment property loan enables a borrower to purchase or construct residential real estate for investment purposes.
An investment loan may also include borrowings secured by residential property for any investment purpose, such as investing in shares.
The risk associated with investment home loans is different to that of standard home loans.
As a result, additional lending criteria will apply:
- Maximum LVR of 95%.
- For small towns not listed as Category 1, 2 or 3, a maximum LVR of 90% is applicable.
- If the LVR exceeds 85% then 10% of the purchase price must be evidenced as genuine savings.
- Clear credit history.
- Acceptable income (as per normal guidelines).
Borrowers can consolidate their debt by combining their existing unsecured debts into their home loan.
Typically, individuals add their consumer loans such as personal loans, car loans and credit cards into their home loan.
With debt consolidation, the borrower has only one monthly repayment, which in many cases, may improve their servicing and reduce their commitment level.
The risk of these applications is significantly higher than the risk posed by a standard purchase or refinance application with no cash out.
The reason for this is that borrowers with significant unsecured debts are often living outside of their means.
If their spending habits don’t change, they risk being in the same situation again in as little as one year after debt consolidation.
As a result of the higher risk, additional approval criteria applies:
- Maximum 90% LVR.
- Maximum of four debts, including the existing home loan can be consolidated.
- Repayment history on all debts must not show any late payments, missed payments, over limits or arrears fees for the prior six months.
- Where funds are released directly to the borrower, equity release parameters are to be observed.
Note: This type of application is considered high risk and is not readily accepted by many lenders for loans that are >80% LVR.
Home renovation loans
The following additional approval criteria will apply:
- Maximum LVR of 95% of revised (on-completion) valuation including all improvements. The valuation must be done by a registered valuer, that evidences the successful completion, prior to the final progress payment.
- Examples of acceptable home improvements include replacement or major upgrade of kitchen or bathroom, the construction of swimming pool, garage or carport, extensive landscaping, upgrade or inclusion of a concrete driveway and/or complete re-roofing of premises.
- If the current value of the security property is sufficient to support the proposed loan amount then the funds can be released to the borrower and progress payments may not be required.
Unacceptable loan purposes
Loans for the following loan purposes are not accepted by lenders:
- Loans for development finance (construction of more than 2 dwellings on one block of land, purchase of multiple blocks of vacant land in a sub-division, refinancing commercial facilities that have been used to fund development finance or developers gearing up against residual stock to fund next development).
- Vendor Finance (WRAP Finance).
- Refinance of debts to the ATO or other tax debts.
Interest only loans
An interest only loan allows the borrower to pay the interest on the loan for the first few years, before reverting to a standard principal and interest loan, over the remaining loan term.
These applications pose a higher risk as the principal amount is not being reduced during the initial years of the loan, therefore the LVR remains higher than that of a principal and interest loan.
Loans with an interest only period of less than 5 years are generally accepted under standard lending policy.
Loans with an interest only period of more than 5 years are considered on a case by case basis and are limited to 90% LVR.
One of our lenders will consider interest only repayments for up to 15 years.
Lenders prefer interest only periods where the loan is being used for investment purposes.
You may be required to give an explanation where an interest only period is requested for an owner occupied loan.
Expert help with bank policy
Our mortgage brokers are specialists in the lending guidelines used by the major banks.
We know how they will assess your home loan application.
To find out how we can help you, please contact us on 1300 889 743 or complete our free assessment form to get in touch with one of our mortgage brokers.