Find out what you can do to get a home loan even if you are newly self-employed, new to Australia, have a poor credit history or no credit history at all.
We have collated some questions from our clients. Here are the top six.
1. Can I still get a home loan if I default on my Credit Report?
This depends on the level of the default, but there are a few options. If it’s a small (under $500) telco default you would probably still be able to get a standard loan, so long as it’s paid and you give the lender a good explanation as to why it wasn’t paid on time. However, if the default is a large amount, then you have two available options. These are to use a:
- non-conforming lender and pay a higher interest rate and fees, or
- credit repair service to have the default removed from your credit file. I generally suggest people go down this path, as it’s cheaper to pay the credit repair company, compared to the higher interest rate and fees for a non-conforming lender.
With that said, it’s prudent to keep on top of your payments from the get-go. If you’re struggling with making repayments to any of your debts and you have equity in your home, it could be worth consolidating those debts into your home loan before it gets to the point of having a default lodged on your credit report.
2. What impact will my credit card limits have on my borrowing capacity?
The higher your limits, the lower your borrowing capacity. It doesn’t matter if you don’t pay interest on these cards (i.e. you pay it off each month). Don’t get me wrong, lenders do like to see that you pay your credit card off each month, however it makes no difference when it comes to your borrowing capacity. For example, if you have a $10,000 credit card limit, this would affect your borrowing capacity by around $100,000. In other words, if you didn’t have the card, you could borrow an extra $100,000.
3. Can I get a home loan if I’m self-employed and can’t prove my income?
Most standard residential lenders will want your ABN to have been up and running for a minimum of 24 months. The reason for this, is that you might be the best electrician/broker/carpenter/
There are lenders that will give you a loan with less than 24 months ABN rego, however the interest rate will be about 2% higher and fees could be up to 1.5% of the loan value (e.g. $7,500 fees for a $500,000 loan). If you don’t have tax returns to evidence your income, these lenders will usually just want your accountant to sign a declaration to state what your annual income is. You may also have to have a larger deposit, than using a standard lender.
Once your ABN has been up and running for 24 months, the majority of lenders want to see 2 years of tax returns showing self-employed income. The banks will then average out the 2 years. For example, if you earned $100,000 in year 1 and $120,000 in year 2, the lender will adopt a figure of $110,000 for their servicing calculations. If there’s more than a 20% variance between the years, in most cases the lender will use the lower year + 20%. There are a few lenders that will only want to see a 1 year tax return, however most of these lenders will require you to have minimum 20% deposit.
It’s important to note that lenders will be looking at your taxable income (after all expenses), so if you’re planning on buying a property soon and you’re self-employed, it’s best if you let us run some servicing calculations for you and if viable, we can work with your accountant to achieve enough “on-paper” income to get you the loan that you need.
4. I’ve just moved to Australia and have no credit record here. Can you help?
In general, if you have a permanent job, a sufficient deposit and the right residential status (Permanent Residency, Australian Citizenship or a specific visa), you should be eligible to get a home loan.
If you don’t have a credit record, then I would advise you to get a small credit card ($1,000 or $2,000 limit), use it, and pay it off every month for at least 3 months. This will assist lenders in assessing your ability to be able to borrow money and pay it back. It will also help to improve your credit score.
5. Why do I have to pay Lenders Mortgage Insurance?
Lenders Mortgage Insurance (LMI) was introduced in Australia in 1965 and was provided by the government in an effort to increase home ownership.
My view on LMI is that we should be grateful for it! LMI is insurance that protects the lender in the event that you default on your home loan. It is a one-off payment that you make when you have less than a 20% deposit.
In order to protect Australia’s AAA global credit rating, the government has told lenders that if there is less than 20% equity in the property, then the loan must be insured.
I’ll expand on that; if you were to default on your loan to the point of the lender foreclosing on your property, LMI will cover the gap between the foreclosure sale proceeds and the value of the loan. This protects lenders, which in turn protects anyone with savings or term deposits (because if lenders went belly-up and started losing money, it would be our savings and term deposits that would be lost).
So instead of having to fork out a 20% deposit, most lenders in Australia will give you an owner-occupied home loan for 5% deposit + LMI costs, which actually means you need about an 8% deposit (based on the value of the home you’re buying). For a $500,000 property this means you only need a $40,000 deposit, instead of a $100,000 deposit. Many other countries (NZ for instance) require you to have a 20% deposit to buy an owner occupied home and a whopping 30% deposit if you want to buy an investment property. This is why I say we should be grateful for LMI – that we have the ability to buy a home with a (comparatively) measly 8% deposit.
6. How is my mortgage payment determined?
If you have Principal and Interest (P&I) repayments, each payment you make will see you paying off slightly more principle with each payment made. For a $500,000 loan at 4%, the first monthly repayment will be around $1,698 interest and $693 principle (total repayment amount is $2,391). However the next monthly payment, despite still being $2,391, will see you paying around $1,696 interest and $695 principle.
Have you heard people say that when you pay weekly or fortnightly, you will pay off your loan quicker? This is because some banks charge a true ‘weekly’ amount. However, most charge a ‘quarter monthly’ amount, payable weekly. A quarter monthly amount is slightly higher than a weekly amount because there are 4.3 weeks in a month. This is the same with fortnightly repayments where most lenders will see you paying back ‘half monthly’ payments, which is more than a true fortnight. If you’re paying a ‘half monthly’ payment each fortnight, you end up paying an extra fortnights payment each year. This is why you pay a loan back quicker when you pay ‘weekly’ or ‘fortnightly’.
If your question hasn’t been answered here, feel free to contact us and we will get back to you as quickly as possible.