Property investment finance is the one of the first obstacles that the potential investor faces…the benefits and advantages of investing in property for wealth building purposes are quite obvious, and if no deposit lending including costs was freely available, naturally everyone would be an investor!
However this is the post Global Financial Crisis era, where banks who were happy to give you an umbrella when it was sunny are now taking it away when the rain starts to fall.
Loan to Valuation ratios (The ratio of the loan the lender is willing to advance against the value of the proposed property) have taken a step or two backwards….from the heady days of No Deposit, No LMI lending for investment purposes, we are now looking at restricted lending requiring at least 5% deposits plus costs.
Some of the big 5 lenders will require a 10% deposit if you are not a current client…the lenders mortgage insurers have also had an influence on credit criteria. The Lenders Mortgage Insurer (such as Genworth) is the insurer the banks turn to to cover the risk of higher LVR lending.
These premiums are paid for by the client as part of the costs, and are calculated on a sliding scale from an 80% LVR up to 95%, and can cost upwards of 3.5% of the purchase price.
It was the willingness of the Lenders Mortgage Insurers to insure the No Deposit loans that made them possible for the banks to offer, however they did have their own lending guidelines, and there have been occasions when a client breezed through the lending process with the bank only to have the application declined by the insurer!
In the current climate, the issues facing finance professionals is that the LMI providers require applicants to have at least 5% genuine savings, which means that an amount equal to 5% of the purchase price must have been accumulated by a natural saving process, and held in an account for at least 3 months. Some LMI providers now assess applications by the mysterious method of credit scoring…no one can tell the mortgage broker or client why an application has been declined, only that a complex algorithm has been applied to the applicant and the deal in general; if it fails to score highly enough, it is declined out of hand.
Property finance investment for the potential investor that holds some existing equity in an owner occupied property should be a little easier, but as always the lenders look at the main issues of any application; Deposit or Equity, previous credit conduct (no credit issues, proven ability to cope with existing debt levels), serviceability or available income to service the proposed debt, the suitability of the proposed security and so on.