Did you know that banks have a limit on how much they allow you to borrow? For the bank, that not only includes how much you can borrow in relation to single security but any debts you have with multiple securities as well.
The total debts and existing loan facilities you have with one bank is known as your “exposure” and it can be the key determiner in you getting approved for a mortgage.
How conservative are the banks?
Banks are very conservative when it comes to lending money in general but none more so than when they are considering lending more than $1 million to any one customer.
If you own several investment properties and have total debts of more than $1.5 million then banks are even more wary about lending money to you.
Exposure limits can really catch a lot of people out. For example, let’s say that you need a $3 million home loan to buy a property that’s worth $4 million. You may have a 25% deposit but banks might restrict your loan to value ratio (LVR) because you’re borrowing more than $2 million.
Luckily, not all banks have the same “comfort” level. In fact, some of our lenders are willing to accept up to $10 million in exposure. This is great news for professional property investors who have multiple home loans!
Of course, this all depends on your financial situation, the lender and our mortgage brokers’ exceptional skills in presenting a good case to senior managers within the bank’s credit department and ensuring your application goes through to the right channels.
Please call us on 1300 889 743 or fill in our free assessment form to find out how we can help you.
Like banks, lenders mortgage insurance (LMI) providers have their own exposure limits. A $750,000 exposure limit is typically accepted for a single security but there are LMI providers who have a higher exposure limit.
For multiple securities – say three or four – the general LMI limit is $2.5 million.
It is very rare for people to reach the $2.5 million limit so once your exposure is over $1 million with LMI it is very difficult to get a home loan.
Although there are only two main LMI providers in Australia, we know lenders that are self-insured, so if you want to buy a smaller property worth $200,000, for instance, you can borrow a little less through a self-insured lender so it won’t count towards your entire exposure limit.
Investment income exposure
Banks have different appetites for risk when it comes to a borrower’s reliance on rent and negative gearing.
Most banks will not accept your situation if more than 50% of your total income comes from rent while others will not consider negative gearing in their assessment.
Luckily, we know lenders that understand property investors!
Some of our lenders take negative gearing into consideration and even use the actual repayments you make on your existing loan commitments rather than the “loaded” interest rate which the banks use as a buffer to mitigate against risk.
So instead of using a high repayment figure, they will consider a lesser repayment amount which is great if you have multiple properties in your investment portfolio.
Common debt exposure
If you are buying properties with friends, business partners, family or your spouse then the bank looks at the total exposure to your group rather than your individual exposure limit.
For example, if a bank allows up to $2.5 million in exposure and you have a $1 million loan with a friend on an investment property; a $1 million home loan on your own; and your friend has a $500,000 home loan, then you have reached your exposure limit.
Unfortunately, you don’t get a larger exposure because there are more people. Borrowing as a group such as with your brother or parents can catch a lot of property investors because your borrowing power will forever be affected by this common debt.
If exposure is likely to be a problem for you in the future then in some cases, it makes sense to borrow separately rather than with other people.
Even if a married couple buys properties separately, some banks will consider them to be different borrower groups and will allow them to double the exposure that they would otherwise allow.
Please call us on 1300 889 743 to discuss your situation with one of our brokers and we can find you a solution.
Total banking group exposure
What about if you have a loan with St George, another with Westpac and another with Rams? Since Westpac owns St George and Rams, is this considered as the same exposure?
Most lenders consider their exposure as a group of lenders rather than the individual exposure of each. So think of Westpac, Rams, St George, Bank SA and Bank of Melbourne as all being the same bank for the purposes of calculating your exposure.
There are many banks that own other lenders. For example, Commonwealth Bank owns BankWest and Aussie home loans, while National Australia Bank owns Homeside, NAB Broker, Advantedge and several broker groups that have rebranded Advantedge products.
People are most often caught out by lenders that use many brands. In particular, Adelaide Bank, Pepper, Resimac and ING fund many non-bank lenders behind the scenes which means these lenders calculate exposure together.
Exposure in one development
Banks are particularly cautious when lending to someone wishing to buy a number of units in a single development.
This is what is known as “individual risk” and, generally speaking, banks will not lend to someone wanting buy 20 to 25% or 3 to 4 units in a single development, depending on the size of the block.
For example, you may be able to get approved for a home loan for up to 4 units in a single development but cannot own 25 units in a block of 100 units.
The reason for this policy is that if you as the borrower get into financial trouble and have to sell these properties, the bank will likely be required to sell them at a reduced price. The banks don’t want to make a loss!
Recently, Westpac Group combined their security register and found they have some blocks where they are over their exposure limits. People who had been pre-approved to buy in these blocks were surprised to get their loan declined when they applied for formal loan approval.
In these cases, the banks may still take on the loan if the customer can increase their deposit size so that their loan is less than 70% LVR (Loan to Value Ratio). However, we would just apply with another bank or spread your exposure across a number of lenders.
Call us today on 1300 889 743 today or complete a free assessment form and our brokers can help you to kick-start your property investment portfolio.
Spread your exposure
When you have multiple mortgages with the one lender and it starts reaching the $1 million mark, your ability to borrow more is significantly reduced. On top of that, your LMI premium gets more expensive with the addition of more loans that you have with the one bank.
The number one solution that property investors employ is to spread their exposure across multiple lenders and LMI providers.
Keep in mind though that most insurers look at their overall exposure per client so even if you spread your exposure across multiple lenders they may still operate under the same insurance provider.
Our brokers can identify where the exposure limit issue is – whether it’s with the lender or the insurer – and spread it accordingly with lenders that use a different LMI provider.
We also have special relationships with the credit departments of the major banks and know what their risk appetites are. With our help, we can present a good case to the bank and help you to get approved for a home loan so you can continue to grow your property portfolio.
Call us on 1300 889 743 or complete our free assessment form and we will tell you how we can help.
What is an exposure limit?
“Exposure” refers to your total debts as a borrower and it is a very important factor when a bank is considering lending money to you.
Exposure includes business debts, credit cards, personal loans and all other outstanding or approved debt facilities from a bank.
Generally speaking, a bank is willing to lend more to someone who has little debt and less to someone with a significant amount of debt.
Since the global financial crisis, Australian banks have grown more conservative in their exposure limits which means it’s more difficult than ever for good borrowers who have a high exposure, such as property investors, to get approved for a home loan.
Bank exposure terminology
The banks use several different words when they are talking about their exposure:
- One Obligor Total (OOT): The total debt balance or limit for one borrower or group of borrowers.
- Aggregate exposure: Another way of saying the total exposure to one borrower.
- Guarantor’s exposure: The maximum amount that can be claimed by a lender under a guarantee.
Are exposure limits confusing you? We’re here to help!
Call us on 1300 889 743 or complete our free assessment form to discover how you can further your property investment goals.