What Is New In Finance?

Full-doc & Low-doc
There is no doubt that lenders are still hungry for loans. What appeals to them most though is something they can have little doubt in. Basically this means Full Documentation or Full Doc Loans.

Full Documentation for those who don't know is where a lender can verify all the information provided in an application, most importantly income. When a lender can verify that you are able to meet the repayments for a proposed loan there is less risk involved for them. Although lower LVR's are still in place, 90% mostly as the maximum, we are still seeing a willingness of Lenders to approve applications. Lo Doc is still available although I think we are all familiar with the limited 80% LVR Lenders these days.

LVR (Loan to Valuation Ratio)
What I’m seeing now is that lenders have reduced their LVR in the last 3-4 months to minimize risk in order to feel more comfortable in the current market conditions.

90% LVR for full documentation loans are what the clients should be expecting when applying for a loan now. However, there are exceptions to the rule, with some lenders offering up to 95% LVR if you’re an existing customer with a perfectly conducted history record.  Other lenders may consider up to 95% LVR depending on the star ratings of the individual brokers.  Our team of brokers are rated Preferred Partner/Broker with many of our lenders, which gives us the edge to offer our clients a wider range of products options and definitely faster turnaround time. I think this is where we stand out from most other brokers in the industry.

Since the Mortgage Insurers have introduced tougher policies on Low Documentation loans, the LVR has been reduced to 60% for most lenders today.  We are down to only a few lenders left in the market who would still consider lending up to 80% LVR under Low Doc basis.

Variable Interest Rate / Fixed Interest Rate
Tighter liquidity in the wholesale global markets has seen lenders pay a premium price for their funding. Nonetheless this higher cost has not prevented Australia’s big four banks from raising a significant level of capital in the wholesale market over the last 6 months, in the event to re-capitalise their balance sheets, a process deemed necessary for their financial survival. So what does all this mean to the average borrower? The answer to this question is simply higher interest rates of course, as bank’s need to recover this higher cost of funding to maintain on-going profitability.

More specifically, over the last several months we have seen the Banks progressively increase interest rates on their fixed interest rate loans, in direct response to the higher market costs incurred for raising this money, which has in turn provided for almost a 200 point differential between variable interest rates and some 3 Year and 5 Year fixed interest rates. As such the primary question on every Borrower’s mind is - do I fix the interest rate on my loan or not? There are obvious advantages to fixed interest rates however whether these advantages prove to be a benefit to the borrower will inevitability depend on the borrower’s respective financial position. It is important however to remember that fixed interest rates primarily provide an “insurance policy” for the borrower and gives certainty in respect to finance costs over a given period of time. If you have been debating the question of whether or not to fix the interest rate on your loan, then now is the time to talk to your broker to examine the benefits (if any).

First Owner's Grant - Relate This To Investor's Children
First-home buyers rushing to sign contracts before July can relax with news the first-home owner's boost will be extended in full for three months. After September, those entering the market will be eligible for half the boost until the end of the year.

First-home owners entering contracts between July 1 and September 30 will continue to receive the boost of $7000 if they are buying established homes and $14,000 to buy new homes. Combined with the First Home Owners Scheme grant, this means first-time buyers will get a total of $14,000 when they buy established homes and $21,000 for new homes.

The boost will halve for those entering into new contracts from October 1 until December 31, with those buying established homes receiving $3500 while those buying new homes will receive $7000. This means the former will get a total of $10,500 and the latter will receive $14,000 when combined with the $7000 first-home owner's grant.

So far, the first-home owner's boost has helped 59,000 Australians buy their first home. There are talks about rental crisis and lot of people realise you might as well buy and now they have been going through a rush to buy. Investors are worried that the continuation of the boost will further inflate the price of homes, but at the same time most investors want their children to get into property investment as soon as possible.

Firstly, the solution to inflating prices is to buy a place and renovate instead. Most first home buyers don’t go for properties in that bracket. As an investor, if you can convince your children that the solution is in being productive, they can make money in the inflated market as well.

Secondly, if first-time investors do buy NOW, they have the option to fix their interest rate which is much more comforting thought for first-home buyers then buying property cheaper. For example, a $200k house will have an interest only repayment of approx $1000 pm on a loan that you can fix at 6% and even if the prices were to deflate by as much as 5%, the interest-only repayment is approx $1185 at an interest rate of 7.5% which is a real possibility in the time to come.

Thirdly, if you, as a first time investor, don’t get into the market now, you will find the next 2-3 years may be harder because of uncertainty in finance and employment. And by the time things get stable, you might have missed the boat already because once the market starts to rise, it should rise steeply.

Lastly, and the most obvious one, if perspective first-home-grant eligible buyers get into the market now, they will have to put the least amount of money from their pocket than they would if they were to buy a few years ago or a few years in the future.

This article was written by The Mortgage Finance Strategist Team. Investors Direct is an award winning Mortgage Company specialized in strategies and finance for residential property investors since 2001.  Investors Direct is the finalists in the 2008 Australian Mortgage Award for Brokerage of the Year (Over 12 Staff Category) & Best Customer Service from an Individual Office.