Home loans in Australia – how much can I borrow, how do I get finance, credit rating, interest rates, deposit amount, overseas income

Home Loans in Australia

This comprehensive article will help newcomers understand:

• the philosophy of financiers
• financial institution requirements
• how credit applications are assessed
  

Written by Anton Vdovin, Principal, Proper Finance Solutions, 5 April 2004

___________________________________________________________________________________

General information about home loans and interest rates

When newcomers apply for a home loan in Australia, they quite often experience difficulties with Australian financial institutions. This may range from a simple request for additional documentation up to refusal to provide the credit. 

However, in some instances these problems can be avoided by making the right application to the right lender. 

In Australia over 40 lenders provide finance for purchasing a property. Among the great variety of services there are several common products:

1. Standard Variable Rate* Home Loan

A variable loan means that the lender can change the interest rate from time to time depending on market conditions.

2. Discounted Variable Rate Home Loan

This is a ‘no features’ product with the interest rate usually lower than the Standard Variable Rate Home Loan.

3. Honeymoon Rate Home Loan

This loan has most of the features of the Standard Variable loan, but has a special reduced interest rate for the first six to 12 months. It is widely used by banks to attract new customers.

4. Fixed Rate Home Loan

Has a fixed interest rate for an agreed period (usually one to five years) and may have less features than the Standard Variable Rate Home Loan. At the end of the fixed period the interest rate switches to the standard variable rate.

5. Line of Credit

This is a loan that does not require the borrower to draw down the full amount of the loan in one lump sum or to regularly repay the loan (reduce principal), however the interest charges are normally paid every month.

* You can view current Standard Variable Rate by going to websites of the four major Australian banks: 

National Australia Bank http://www.national.com.au

Australia and New Zealand Banking Group http://www.anz.com

Westpac Banking Corporation http://www.westpac.com.au

Commonwealth Bank of Australia http://www.commbank.com.au

Normally, the maximum term of the loan is 30 years, however there are lenders that allow for 40 years. 

Banks may charge various fees including but not limited to application fee, property valuation fee, loan ongoing fee, loan repayment fee and so on. 

The best loan for you will have a combination of the best interest rate, flexible conditions and cheaper fees.

Comparison rate

From 1st July 2003 Australian Securities and Investments Commission (ASIC) http://www.asic.gov.au requires all credit providers and finance brokers to supply consumers with a comparison rate. Compulsory comparison rates are calculated by adding fixed fees and charges relating to the credit being offered to the interest that will be charged. 

In other words, it reflects the total cost of credit (excluding any fees that may or may not be charged depending on circumstances, e.g. early repayment fees). Looking at comparison rates for different loan products will give you an idea which one will cost you less. It will be a valid comparison if you make sure that the comparison rates are quoted for the same loan amounts over the same loan terms.

How much can I borrow?

Lenders assess your borrowing capacity based on various factors. The most important criteria are:

1. Income level, its source and stability.
2. Your current financial commitments and living expenses.
3. How much of your own money (deposit) you are prepared to contribute. 
4. Your credit history.
5. The quality of the property you are purchasing and offering as a loan security.

If your circumstances do not give the best answers to these five questions, it does not mean that you do not have a chance of borrowing. Your application may be still eligible, but the lender may charge a higher interest rate and fees and/or limit the loan amount. Below you will see different options for several newcomers’ situations.

Income level

Income demonstrates your ability to repay the loan. In a banks’ view, this is the most important parameter. It will affect your maximum loan amount as well as the portion of your house value that you can borrow.

You do not have a job yet

Getting a loan would be extremely difficult and the only possibility would be if you convince the lender that you have other sources of income or will start earning in the near future. 

For example, if you have investments overseas, or your employment contract will start in couple of months, or you are planning to sell another property to pay off this loan, etc. If you get the application approved, the maximum loan amount may be around 60% of the home value. The lender would consider this loan as high risk lending and may charge an interest rate 2-3% higher than the standard variable rate and may or may not request additional mortgage insurance. 

You recently started a job in Australia

Lenders are usually hesitant if you have been in your new job less than three months, you are on probation (not confirmed permanent staff) or you have casual, part time or contract work. It may be best to wait until the probation period is over and then apply. Ask your employer to write a letter stating the employer’s name, address and phone number, your position, wage, starting date, and the fact that you are not on probation any more.

Many people rent a property when they move to a new location so that they can work out where they would like to live on a permanent basis – so you can use this time to investigate your new location and do some background research on the best type of property to buy.

Generally, your maximum borrowing capacity would be 80% of the home value. The interest rate might also be 1-2% above the standard variable. Higher borrowing is still possible but will depend on the level of your income and also on continuance of your occupation. If your previous profession was similar to the current job, try to get a letter from your previous employer to demonstrate consistency.

You started or bought a business in Australia

The general requirement from lenders is that you need to run a business for at least two years to demonstrate its profitability. Only if you are able to prove good business income (current contracts with your customers, substantial client base, etc.) then you may get a loan for up to 80% of your property value. Lenders would probably charge 2-3% extra on top of the standard variable rate.

You have been employed for more than 12 months or running a profitable business for more than 2 years
In this case your income may qualify for general lending criteria and you may be able borrow up to 95% of your home price or even higher, provided all other criteria are met. You will need to supply your pay slips and previous tax returns. For loans exceeding $250,000 you might be able to get a discount rate from a lender of up to 0.6% off the standard variable rate.

You are receiving income in Australia but do not wish to substantiate it by documents

In that situation, lenders normally require borrowers to sign a declaration stating their income. Your maximum lending ratio would be 80%, however a higher interest rate and additional charges may apply.

Overseas income

Not all banks accept overseas income. You may go to international banks such as Citibank http://www.citibank.com.au and HSBC http://www.hsbc.com.au  They are more flexible with foreign earnings, however you still need to submit full documentation from the country of origin including pay slips, tax returns, bank statements, etc. Your maximum borrowing would be 70-80% and standard variable rates will apply. It is a good idea to collect any records and request copies of credit history/ratings before you leave your previous location.

Other financial commitments and living expenses

Large financial commitments generally reduce your borrowing capacity. They can be: other loans, credit or store cards, rental payments, child maintenance, etc. Keeping them to a minimum is a good rule to follow. DO NOT try to hide your liabilities when making a loan application, the bank will find most of them on your credit file. And even if they are negligible, the lender can decline your application for non-disclosure of financial information.

As far as living expenses are concerned, each lender has their own way of calculating them. The higher they are the less you can borrow. Basically, the number of adults and children in your household is the key indicator. When your actual expenses are different to the lender’s estimate, the larger of two figures will be used. Thus, you would have the maximum borrowing capacity with a lender that has a calculation similar to your real situation.

Credit history or Credit rating

Information about your credit history in Australia is held on your credit file. If you have not applied for credit in Australia before, there will be no file in your name. Each time you apply for a loan, a note will be added to your history outlining your enquiry or the loan that has been taken out. Lenders use this information to see how often you use credit and how well you service it. Frequent enquiries on the file may show that you unsuccessfully tried to get finance from different sources. This would make your next lender a bit cautious. 

But the bigger problem is when you have a default listed on your credit history. This can happen, for example when you have not paid your electricity bill or any other commitment after several requests. In Australia, telecommunication companies can list a default immediately after you have not paid a phone bill after their last warning. Another story is when you do not meet your commitments with banks. It normally takes them longer to record this on your credit file, however that would severely affect your future affairs with all other banks. Try to NEVER DEFAULT WITH BANKS AND CREDIT PROVIDERS.

Keep you credit history clear

Pay your bills on time. Try to do it always by yourself, even if going overseas for a while (use internet or phone banking, BPay, credit card bill payments, etc.). If you are asking friends to look after the bills, check on them by accessing your accounts on the payees’ websites. If moving to another address, give the new address to all providers and banks you use, so correspondence from them will not be lost. 

Try to get your loan application right from the first run. Choose a lender where you have good conditions and the best chance to receive an approval. Several applications to different lenders at one time will make them very cautious about you. You can order a copy of your credit file by contacting Baycorp Advantage http://www.baycorp.com.au

Deposit amount

Lenders usually expect you to contribute your own money towards your home purchase. ‘Your own’ means that you have saved the funds over a period of time of at least 6 months. It can be savings in your bank account, proceeds from the sale of another property, shares, investments, term deposits, etc. If your deposit is gifted by your parents or just is cash, you still can apply for a home loan, however the lender may restrict the loan amount.

The property

If the house or apartment you are buying is to be used as a security for your home loan, the lender will assess how adequate the property is. If it is more or less standard, located in a metropolitan area and there are lots of similar properties in the market, you should not have a problem. However, you may experience some difficulties when borrowing against:

• properties in rural areas
• small apartments (less than 40 square metres)
• inner city apartments in Melbourne and Sydney
• serviced apartments
• large properties (over 20 acres)

First Home Owners Grant

The Australian government provides first homebuyers with a $7000 grant. You may apply for the grant to a lender together with your loan application. The funds will be counted towards your deposit. Details are available from http://www.firsthome.gov.au

Do not forget about costs

When you are purchasing a property and taking out a loan, you will have to pay various fees and charges including stamp duties, bank fees, solicitor costs etc. In many cases, this can represent as much as 6-8% of the purchase price. To get a more accurate figure, visit the Commonwealth Bank online calculator at http://homepath.com.au/guest/CBA_CALC_TPC3_input.html

If your situation is different

If your circumstances have not been described above, you still have a chance to take out a loan for your home in Australia. 

If you do not have permanent residence status in Australia or Australia is not your principal country of residence 
Some lenders may consider your application on case-by-case basis and lend you up to 70% of your purchase price. It will depend on the strength of your income and your financial position. You also will need to obtain an approval to purchase Australian property from the Foreign Investment Review Board (FIRB) http://www.firb.gov.au (they also publish downloadable guides)

You have little income or not enough funds for a deposit but you parents or relatives want to help you financially
In this case whoever is assisting you will have to demonstrate their income and the deposit. They will be requested to sign a guarantee to the loan, which makes them fully liable for the debt repayment. Before taking on such liability, they may be asked to obtain independent legal advice. 

How do I get finance? Shop around banks or use a broker?

If you go to a bank you will get the best deal available from that bank, but if you go to a broker, you will have the best deal from all of the lenders they deal with. As brokers deal with a wide range of lenders, they usually know where to search for the most suitable loan for you. They are also aware of specials and discounts offered by banks from time to time. 

However, to get the most out of using a broker, you need to make sure that he or she is acting solely in your interests (and not steering you to the products that provide the most benefits to them). 

As the mortgage broking industry is relatively young in Australia, it is still unregulated. To see more information about the industry and how to choose a mortgage broker, view the Industry page on my website http://www.properfinance.com.au/about_industry.htm

Useful resources and information about consumer credit

Mortgage Industry Association of Australia (MIAA)
http://www.miaa.com.au

Finance Brokers Association of Australia (FBAA)
http://www.fbaa.com.au

Australian Securities and Investment Commission (ASIC)
http://www.asic.gov.au

Australian Securities and Investment Commission (ASIC)
- website with financial tips and safety checks for investors and consumers of financial products
http://fido.asic.gov.au

Unified Consumer Credit Code (UCCC)
http://www.creditcode.gov.au

Mortgage Industry Ombudsman Service (MIOS)
http://www.acdcltd.com.au/4225,01,1-0-Mortgage%20Industry%20Ombudsman%20Service.php

Australasian Institute of Banking and Finance
Has an excellent section called Monster Links that links you with most areas of the finance industry in Australia including individual banks
http://www.aibf.com

Australian Banking and Financial Services Ombudsman
http://www.abio.org.au

I am happy to receive your experiences or questions about borrowing in Australia anton@properfinance.com.au  I can also be contacted on 0423 055 241. 

I was a newcomer to Australia too so I understand exactly what you are going through!



Anton Vdovin
Principal
Proper Finance Solutions
Phone +61 3 9909 7474
Fax +61 3 9909 7496
Mobile 0423 055 241
Email enquiries@properfinance.com.au
Web http://www.properfinance.com.au
Address Level 1, 530 Little Collins Street, Melbourne, Victoria 3000, Australia

Disclaimer
The purpose of this article is to assist newcomers by providing general information about borrowing for property purchase in Australia. Credit products and requirements vary from lender to lender and it is nearly impossible to give more accurate information without knowing your position. Under no circumstances, this material constitutes advice, and you should not treat it as advice. If you need professional advice, please contact your financial adviser or chose one from Australian Financial Planning Association http://www.fpa.asn.au/Consumers/FindaFinancialPlanner.asp