Lending CriteriaBuying your first home is an exciting time for most people but can also be a headache for others if the right advice is not sought. Puzzle Finance have helped dozens of clients arrange finance with our specialist advice and a number of funding options with a minimum of hassle - this allows more time for our clients to locate their dream property instead of having to spend time researching the hundreds of products available today.
Let Puzzle Finance assist you in navigating the sometimes overwhelming number of choices for first home buyers to ensure we find the most suitable finance solution for you.
Many first homes buyers have an additional set of criteria to meet when applying for a home loan, namely that of the mortgage inurer. Some lenders have their own mortgage insurace divisions, where as others rely on an external provider, the main 2 being Genworth & QBE. The banks & mortgage insurers have specific lending policies which they use to assess home loan applications from first home buyers and these vary from lender to lender but generally speaking, the same 'core' set of criteria applies.
If you fall outside of the standard guidelines, in some cases the lenders can consider your application 'outside of policy' based on its merits. Puzzle Finance are the experts in securing a finance solution for first home buyers so let us do the work for you and apply to the lender which best suits your needs and caters for any specific aspects of your appliation.
The below lender guidelines for general information only – maximum loan amounts, loan to value ratios and eligibility will be on a case by case basis
Maximum loan amountsTo maintain acceptable levels of risk lenders have preferred maximum loan amounts. Loan amount limits apply on a “per security” basis. Loan amount limits may vary by loan product, loan purpose or security location. It should be noted that the lender may choose to limit the proposed loan amount based on the individual merit or risk of the loan application.
- 95% LVR : $750,000 (some lenders consider up to $1,000,000).
- 90% LVR : $850,000 (some lenders consider up to $1,000,000).
- 80% LVR: $1,000,000 (some lenders consider up to $2,000,000).
- 70% LVR: $2,000,000 (some lenders consider up to $5,000,000).
- 60% LVR: $2,500,000 (Unlimited loan sizes are available from lenders without exposure limits)
Maximum LVRsThe “ Loan to Value Ratio ” (LVR) is one of the major elements of risk and is one of the vital considerations of any loan application.
The LVR is the loan amount as a percentage of the purchase price or the security valuation amount, whichever is less. The maximum LVRs referred to in this Policy are considered to be the preferred LVRs for many lenders. LVRs may vary by product, loan purpose and security location.
In the case of construction loans, the LVR is determined on either of the cost (land value plus tender) or the on-completion valuation, whichever is lower.
It should be noted that the lender may choose to limit the LVR of the loan based on the individual merit of the application or the specific loan product.
The maximum base LVR is 95%, or up to 97% including capitalised LMI. This covers the majority of standard dwellings in capital city metropolitan locations and some larger regional centres.
Excluded borrowers include: Limited liability companies, associations, churches, clubs, minors (under the age of 18).
- Natural person (over the age of 18)
- Trustee of a Trust
- Any multiple or combination of the above borrowers.
Under responsible lending guidelines, applications for owner occupied dwellings for applicants over the age of 55 will be more closely scutinised to avoid a situation where a borrower may still be repaying their loan well into retirement - generally, a strategy such as using superannuation entitlements to retire any balance of the debt or a shorter loan term will still be considered acceptable.
Borrowers of convenienceA borrower of convenience is defined as a borrower that is added to the loan application to provide serviceability and/or security but does not receive a tangible benefit from the loan transaction.
Borrowers must have a beneficial interest in the loan transaction either by way of joint ownership of the security and/or dependence on the mortgagor in a marital or de facto relationship.
It is not acceptable for a person to be added to a loan simply to provide income support for servicing, or simply to provide added security for another party to purchase a property. The exception to this is with a Family Equity type of loan which allow for a limited security guarantee from a related party.
Click here for more information on Family Equity loans
Non-resident & Offshore BorrowersFor the purposes of this policy, a non-resident is deemed to be any person without permanent residency
status in Australia, and/or any person who resides and is employed in another country.
New Zealand citizens living and working in New Zealand or permanent residents of New Zealand are considered residents of Australia and are not treated as non-residents.
Maximum LVR & Loan Amount
Borrowers must be High Net Worth, generally with net assets in excess of $500,000.
- 81% – 95% LVR: Not available (Note that there are exceptions with some lenders).
- 80% LVR: $500,000 (Note some lenders allow loans up to $2,000,000 at 80% LVR for non-residents).
- 75% LVR: $750,000.
Where one borrower is a citizen or permanent resident of Australia or New Zealand and the other borrower is a non-resident as per above definition, any proposal will be assessed under normal policy and not under the Non-Resident policy above.
Click Here for more information about Non Resident Lending
SavingsBorrowers who have saved a deposit are generally more likely to be prepared for difficult circumstances. They have proven their ability to manage their finances responsibly & live within their means and will usually be considered for a higher LVR
Genuine savings need to be evidenced in the following circumstances:
- Home loan >85% LVR: 5% genuine savings required.
- Home loan <85% LVR: No genuine savings are required (not offered by all lenders).
Must be held in the borrowers name and include:
- Funds held or accumulated in savings accounts for 3 months or more.
- Equity in residential property.
- Term deposits held for 3 months or more.
- Shares held for no less than the last 3 months.
- Lenders may allow a gift / inheritance to be used where savings have been sacrificed by making accelerated loan repayments over the last 3 months. In these circumstances, the existing savings plus the value of excess repayments must be equal to or greater than the minimum savings required.
- Rent paid over the past 12 months via a managed agent can be considered when the full 5% has not been genuinely saved
These do not contribute towards the 5% genuine savings requirement:
- Gifts or inheritance (see genuine savings above). *
- Proposed savings plans or rental purchase plans of any kind.
- Sale of assets (other than real estate) for example, motor vehicles. *
- First Home Owners Grant (FHOG).
- Funds held in company / business accounts.
- The proceeds of a personal loan.
- Builders or vendor’s rebate / incentive.
* Some Lenders will now consider the sale of non-real estate assets, tax refunds, bonus/commission payments, gifts/inheritance or rental payments where a 12 months rental history has been established as a form of genuine savings for part of the 5% - LVR restictions & conditions apply
Savings plans & rental purchase plans
Savings plans provide for the borrower to save for the deposit on a home after approval of a mortgage loan. Similarly, rental purchase type arrangements enable the borrower to save the deposit whilst occupying the security. These rental purchase arrangements are commonly referred to as wraps or rent to buy schemes.
Neither of these types of plans are acceptable for mortgage insurance, borrowers are restricted to loans of 80% LVR or less. Borrowers may receive approval if they can provide their own evidence of the required amount of genuine savings outside of the savings plan.
Employment & incomeAcceptable employment statuses are listed below.
Permanent salary/wage employment (full-time or part-time ) and Contract employment:
- Minimum 2 years continuous employment in the same industry, or
- Minimum 12 months with current employer.
- Where the borrower is within a probation period, application may be considered based on the merits and strength of the borrower’s overall position.
- Minimum 12 months in current employment
- Where the borrower’s only source of income is from casual employment, application may be considered based on the merits and strength of the borrower’s overall position
- Some lenders can consider as little as a three month history in a casual position.
- At least 2 financial years trading in the current business.
- Note: Where a borrower only has 12 months trading in the current business and 2 years in previous employment within similar occupation/field, the application may be considered by the lender as an exception, based on the borrower’s self employment circumstances and the overall strength of the application.
- Minimum 12 months in current employment.
- There are some lenders that can consider an exception to this Policy.
Acceptable income types
- Salary and wages: 100% accepted if length of employment criteria is met.
- Overtime: 100% may be used to assist in serviceability if payment is regular and can be confirmed in writing as a condition of employment. If written confirmation is not available, evidence of overtime over past 2 years will be required.
- Overtime (Essential Services): Where borrowers’ employment is in the Essential Services industry (e.g. Ambulance, Police Service, Nursing, etc) written confirmation is not required.
- Shift allowance: 100% may be used only if it is a condition of employment and is an industry standard.
- Rental income: 75-80% of gross rental income accepted for standard residential property - where a significant portion of a borrower’s income is derived from rental income, and the proposal is heavily reliant on that amount to meet servicing requirements, the application may be considered too rent reliant.
- Negative gearing benefits: Tax deductible investment loan interest may be added back to net income (after tax)
- Investment income (interest, dividends): 80% of income as demonstrated in tax returns – income level must be evidenced over the past 2 years.
- Social security benefits / government pension: 100% accepted where it is considered permanent for the next five years (unemployment benefit/sickness benefits are not acceptable).
- Car allowance: 100% may be added to the gross taxable income.
- Fully maintained company car: - varies from lender to lender however must be the sole vehicle - if a personal vehilce is owned by a spouse then no company car allowance will be allowed.
- Child support / child maintenance: 100% accepted if the maintenance agreement is registered with the Child Support Agency, six months consistent payments can be evidenced via the borrower’s bank account statements and it is considered permanent for the next five years or dependent/s under 12.
- Self-Employed: Borrowers must produce the last 2 years business and personal tax returns. Income evidence must demonstrate consistent income levels for the years under review, however, it would not be unrealistic for each year to reflect an increase up to 20% in the net profit. Where taxable income has increased over the last two years by less than or equal to 20%, then the latest year’s income is to be used. Where taxable income has increased over the last two years by more than 20%, then maximum of 120% of the previous year’s income must be used.
- Depreciation: allowance varies on type of asset being depreciated and whether loan involves mortgage insurance
- Superannuation: Contributions in excess of the compulsory 9% of gross annual income may be added back to taxable income.
Unacceptable income types
The following income sources are not acceptable:
- Workers compensation.
- Income from boarders.
- All other forms of income not listed in the above “Acceptable income types” list.
Joint income & Commitments
Where the borrowers have existing joint commitments with parties who are not included in the loan application, 100% of the existing commitment is to be used in calculating serviceability for the new loan.
If the borrowers share a positive income source such as rental income with parties not included in the subject transaction, the borrower’s tax return or certificate of title is to be used to ascertain the percentage of ownership. The percentage of ownership will then be applied to the gross joint income, to determine the amount used in calculating serviceability for the new loan.
Note that this means that if you have a property that is jointly owned with someone that is not applying for your new loan, then the bank will use 100% of the repayments on your investment loan, but only 50% of your rental income and 50% of any negative gearing allowances for interest.
Rent free with parents
Where the borrower is purchasing an investment property, and is said to reside with family or friends either rent-free or at an unusually low cost, a notional rental expense of $150.00 per week ($650 per month) per applicant may, at the lender’s discretion, be included as an existing commitment when determining serviceability. This is to manage the risk that the borrower may move out of their current residence or move into their investment property later on.
This notional rent expense will not apply to loans for the acquisition of vacant land.
SecuritySale of the security is the alternative means of clearing the loan debt should the borrower/s not be able to fulfil their repayment obligations. Therefore, it is vital that the security is readily saleable to avoid a protracted selling period. As a general rule this means the property must be in a high demand location, be in a good condition, have a wide appeal to potential buyers and have few or no restrictions on it being sold.
Some lenders will consider any application for a standard home loan, up to 95% LVR where the security property is located anywhere in Australia, depending on the level of activity in the market & if there are sufficient comparable sales to accurately assess the market value of the property.
Security property requirements
Security policy exceptions
- Must be zoned for residential use.
- A house, villa, home unit, townhouse, duplex, or vacant land.
- Acceptable land tenures include:
- Freehold – including Strata, Group and Community titles (Community Title properties in NSW and VIC are only acceptable if the development has been fully completed).
- Crown Leasehold.
- Residential Area Rights and Residence Licences (Victoria Only).
- Power is connected.
- Must have direct vehicular access, i.e. access is not via another private property.
- Readily saleable with no adverse features such as:
- Affected by any government or state planning scheme.
- In need of repair or has been poorly maintained.
- Reduced marketability due to location.
- At least 50 m² in living area, excluding balconies and car space (For good quality properties located in a desirable and high demand capital city metropolitan location, the minimum living area is 40 m²).
- Other security types may be accepted, subject to limitations.
Where a loan is secured by one of the following typically higher risk security types, the application may be considered based on the merits and strength of the borrower’s overall position:
These properties present a higher risk to the lender due to the reduced sale-ability and in some cases their fluctuating values.
- Known flood height level is higher than the floor level.
- Multiple occupancy security (more than two dwellings on the title).
- Display home.
- Located on an island without sealed road connection to mainland.
- Security boundary located within 50 metres of High Voltage Transmission Lines.
- Part of a development that has been converted from another usage.
- Vacant land exceeding 2.2 hectares (5 acres /22,000 m²).
- Studio apartment or bed-sitter (no separate bedroom).
- Serviced apartments.
- Properties that are unique, or have restrictive usage.
Unacceptable security properties
- Income producing rural properties (Commercial farms, note that hobby farms are acceptable).
- Properties designed, zoned, or used for commercial purposes (excluding residential home units in a commercially zoned development).
- Properties to be constructed by an owner-builder (in whole or part), where the LVR exceeds 50% of the lesser of the cost price or valuation, or construction by an owner builder completed under the “Home Building System” systems where the LVR exceeds 75%.
- Crown Land (other than the ACT).
- Leasehold properties (other than Crown Land in the ACT).
- Purple Title (W.A.), or Moiety Title (S.A.).
- Company Title
- Company Share Title (VIC)
- Improved site with land size larger than 40 hectares.
- Under a “time share” arrangement.
- Land subject to license to occupy.
- Limited Title (any defects).
- Mobile or temporary homes (You can borrow against the land value only).
- Boarding house/hostels.
- Land/Improvements contaminated.
- Properties with “Lease of Life” covenants on title.
- A strata title home unit less than 40 m² (meters squared).
- Properties subject to the Western Lands Act.
- Properties subject to “mines subsidence”. Note it is still possible to borrow from some lenders if you obtain a certificate from the MSB.
Rural residential & rural properties as security
Rural Residential properties must:
There are many types of local council zonings on rural property. For the purpose of this Policy:
- Have water and power connected (tank water is acceptable however solar power is not).
- Not be income producing (not a commercial farm).
Stratum tile units
- A property with residential improvements between 2.2 hectares and 10 hectares in size is considered Rural-Residential.
- A property with residential improvements between 10 hectares and 40 hectares is considered Rural.
May be considered up to a maximum LVR of 85% (depending on strength of application).
Inner city apartments
A High Density Apartment is a strata titled home unit or apartment located within a postcode defined as a High Density Location, and part of a development comprising more than 35 apartments or 4 stories in height. Note that the policy for this varies depending on the lender. Some lenders have no restrictions on inner city apartments.
The following conditions and restrictions apply to these types of security:
The following security types and borrowers are not acceptable:
- Maximum LVR of 80% may be considered.
- Valuation should include comparable sales outside the development, and details of any resales within the development.
- Security must be in a prime location.
- LVR and concentration restrictions may apply to individual developments (Some developments are known to lenders and are specifically approved or listed as unacceptable security).
- Up to 50% of gross rental accepted for servicing.
- A minimum floor size of 50 m² (40 m² in high demand locations) in living area, excluding balconies and car space.
- Should be a “High Net Worth” borrower with net assets over $500,000 (exceptions apply)
- Houses within high density locations are exempt from this policy, as are home unit developments comprising a total of 35 apartments or less.
- Each proposal will be considered by the lender on individual merit.
- Loans to First Home Buyers property purchasers.
- Serviced apartments or apartments that are subject to a management agreement.
- Strata title hotel / motel room.
Builders often construct a home for display purposes, and subsequently offer the home for sale to a property investor on a leaseback arrangement, often at above market rental rates. In most cases the lender would regard such an arrangement as a standard residential investment lease, and would assess rental income at normal market rates.
If the subject property is situated within a designated “exhibition village”, and the active life of that village has more than 6 months to run, approval is only available in the following circumstances:
- There is no reliance on rental income from the security, or
- A Bank (or similarly recognised) guarantee is provided to the Lender by or on behalf of the borrower for an amount equal to the total rent payable from the date of commencement of the loan until the date the exhibition village will cease to operate.
This term is often applied to a range of pre-fabricated kit style dwellings, which, once properly erected and connected to power and water, are not significantly different to a traditional dwelling. For mortgage lending purposes, the construction of a pre-fabricated dwelling must be undertaken by a qualified and licensed builder under the Lender’s normal progress payments and progress inspection criteria.
Transportable or pre-fabricated homes should not be confused with any form of “Mobile” or temporary home, which may or may not be permanently affixed to a building site. Mobile homes of any type are not an acceptable security for a home loan.
Funds are not available until the house is complete and a certificate of occupancy has been issued by council. This may cause significant problems for the borrower and builder if it does not match their agreed payment schedule.
This type of security is where an existing dwelling is purchased and then re-located onto another block of land. Re-located homes should not be confused with Transportable or Kit homes.
From a lenders perspective finance may be available however only when the house has been installed onto the new location, all services are connected, renovations are completed and a certificate of occupancy has been issued by council.
An on-completion inspection and report from a qualified Valuer must confirm that the house has been installed and that the property meets our acceptable security criteria.
Note that the only funds available prior to the house being complete are those secured entirely by the value of the land.
House & land packages
Lenders will consider new house and land packages subject to the following:
Off the market transactions
- Valuers are required to comment on the fact that the security is a house and land package, and must document details of any rebates and/or incentives.
- Where builder rebates and/or incentives are noted, the value of the rebate and/or incentive will be discounted from the purchase price.
This relates to the sale of a property where a registered Real Estate Agent is NOT acting for the vendor. This also includes advantageous/favourable purchases to a family member at a discounted price or where a vendor is selling the property at a discounted price to a person to whom he/she is indebted. Lenders refer to this as a “non-arms length transaction”.
In these cases the valuation can be used instead of the purchase price for the purposes of calculating the LVR & the LMI premium (subject to LMI approval). Note that the following additional Policy will apply:
New properties / new units
- Maximum 90% LVR (based on valuation).
- Genuine savings are still required
- The borrower must confirm in writing the details of the trasnaction.
- The lender appointed Valuer must note the purchase price & details of the transaction in his / her comments.
- Each loan will be assessed on a case by case basis.
Newly built properties require additional analysis, in particular in QLD, to ensure the sale price is accurate & to reduce the possibility of fraud. In particular the following types of transactions may require additional supporting documents at the discretion of the Lender:
- New units / townhouses or houses.
- Off the plan purchases.
- Where the sale is without the intervention of an agent (e.g. related vendor / off the market transactions).
- Sales where the buyer is in a different state to the security property.