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Bank Lenders

Qualifying for a loan

Lenders over the course of 2009 have applied a more stringent lending criteria to first home buyers, making it difficult for many new borrowers. Things such as genuine savings are now a criteria for most bank lenders and Mortgage Insurers, along with maximum LVRs (loan to value ratios) being reduced to 90% with the bulk of lenders. So we will explain what these mean.

Genuine savings

If a bank lender is asking for 3 or 5% genuine savings, they are looking for the borrower to demonstrate that they hold 3 or 5% of the value of the purchase property in savings over a minimum 3 month period. Some lenders may allow things such as rental payments and payments in advance on loans/ credit facilities to make up the 3 or 5% savings requirement. But it should be noted, you will still physically need to come up with a 3 to 5% deposit using this previous method. A few of the lenders used to allow the proceeds of the first home owners grant to be used as genuine savings, most lenders now unfrtunately, will not allow any of the first home owners grant to be used as genuine savings.

Maximum LVR

LVR is Loan to Value Ratio abbreviated, your LVR will always be represented as a percentage. This percentage will tell you the amount of value of the property or home that is encumbered or has money owing against it. A $200,000 home with a 65% LVR would have a mortgage against it of $130,000, leaving 35% of the properties equity free. It is good to familiarize yourself with this term, as it is one that will keep popping up over the years and represents some important mortgage lending benchmarks and safe points.

Most bank lenders have now reduced their maximum LVRs to 90%, this means if you were to purchase  a property for $400,000, the maximum loan could only be 90% of that figure at $360,000, likewise if the maximum LVR was 100% you could borrow $400,000.

With the banks shifting the LVR down to 90% in many instances, it has made it difficult for many borrowers to get into the first home and mortgage market, as most first home buyers haven't saved that sort of money, nor have access to parental help. For these reasons it is more important than ever that you explore all of your options with a professional finance broker. Even if you don't qualify for a loan now, you will at least be able to formulate a plan to get you into the housing market in the near future.

There are a few small, non bank and wholesale lenders that are lending through the finance broker channel that you may not know about that will lend above 90%, to get a clear idea of where you stand you can speak to one of our mortgage professionals by clicking here.

Mortgage Insurance

Mortgage Insurance or LMI (Lenders Mortgage Insurance) as it is commonly referred to, seems to be something that is commonly confused. Many people believe mortgage insurance is to protect them if they should lose their income, this unfortunately isn't the case.

Mortgage insurance came about as a means to protect a lender against any shortfall, should they have to move in and foreclose on a mortgage or enact a mortgagee sale, when a borrower can no longer afford to pay their mortgage, the bank will eventually sell their home.  The mortgage insurer will pay the lender the difference between the sale price and any money remaining on the mortgage, should there be a shortfall. Some lenders who raise their funds through securitization/ bonds, have all of their loans mortgage insured to protect their investors, but banks traditionally only insure their loans once the LVR exceeds 80%.

With mortgage insurance comes an insurance premium, the banks unfortunately don't pay this under regular circumstances and pass this cost onto the borrower, so ultimately the banks pass this charge onto you. The premium will normally be reflected as a percentage of the loan amount, the higher the loan and the greater the LVR, the higher the percentage the mortgage insurance premium will be. 

The silver lining of mortgage insurance is that most lenders will capitalize the LMI premium, this means that if you borrow $300,000 at 90% with a mortgage insurance premium of $4,500, the bank will capitalize or add the premium to the loan amount, giving a total mortgage of $304,500. So it at least becomes an indirect expense that you don't pay upfront.

 
The 7 steps to buying your first home