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How Do Mortgage Exposure Limits Work?

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When a bank is considering lending you money, one of the first things they look at is your exposure, that is, the total amount in existing debt you have in your name.

Exposure includes things like business debt, credit cards, personal loans and all other outstanding or approved debt facilities from a bank.

Generally speaking, a bank is more 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 mortgage exposure limits which means it’s more difficult than ever for good borrowers with a high exposure, such as property investors, to get approved for a home loan.

How conservative are the banks?

Banks are very conservative at the best of times but are even harsher in their assessment when it comes to lending people more than $1 million.

If you own several investment properties already and have total debts of more than $1.5 million then banks are even more wary about lending money to you. The reason for this is that the bank see it as you having high exposure and, as such, very reliant on rent and negative gearing.

Luckily, not all banks work within 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, all of this depends on your financial situation and the lender. Our mortgage brokers may be able to get you approved with a lender that has a much higher exposure limit.

That’s because we know how to present a good case to senior managers within the bank’s credit department and ensure that 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.

LMI providers rarely go over $2.5 million

Like banks, lenders mortgage insurance (LMI) providers have their own exposure limits. A $1 million exposure limit is typically accepted, with an absolute maximum of $2.5 million.

It is very rare for people to reach the $2.5 million limit so once your exposure is over $1 million plus LMI, it is very difficult to get a home loan.

Lenders have their own risk appetites

Although there are only two main LMI providers in Australia, we know lenders that are self-insured.

What does that mean for you?

Well, if you wanted to buy a smaller property worth $200,000, you could borrow a little less through a self-insured lender so it won’t count towards your entire exposure limit.

Some banks also have different appetites for risk when it comes to borrowers’ reliance on rent and negative gearing.

Some of them even use the actual repayments you make on your properties rather than the “loaded” interest rate that some banks use as a buffer when assessing your risk. So instead of using a high repayment figure, they will consider a lesser repayment amount, a much more preferable option if you’re a serious property investor.

So what can you do to beat the bank’s exposure limits?

Borrow separately

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 it means you would have reached your exposure limit. Unfortunately, you don’t get a larger exposure because there are more people involved.

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.

What if one bank owns another bank?

What 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 rather than the individual exposure of each lender they back. 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, CBA owns BankWest and Aussie home loans, and National Australia Bank owns Homeside, NAB Broker, Advantedge and several broker groups that have rebranded as 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.

Spread your exposure

When you have multiple mortgages with 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 if you have more loans with the bank.

The number one solution that property investors employ is spreading their exposure between multiple lenders and LMI providers.

However, keep in mind 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 insurance provider – and spread it accordingly with lenders that use a different insurer.

We also have special relationships with the credit departments of the major banks and know what their risk appetites are. With our help, you can present a good case to the bank which will help you get approved for a home loan so that you can continue to grow your property portfolio.

Call us on 1300 889 743 or complete our free assessment form and we can tell you how we can help.