There are several criteria that lenders require applicants with no existing property to meet. These are effectively “hurdles” all of which must be jumped before a loan application can proceed.
Serviceability
Lenders have a legal requirement to be satisfied that you can meet your mortgage repayments every time on time – this called ‘loan serviceability’ . There is no single calculation for this as different lenders vary in the range of things they focus on. But in all cases they will base their response on your current and historical pattern of your income/employment. Also keep in mind that lenders cannot use the current interest rate when calculating your borrowing capacity – they must allow for increases and so the rate used will normally be around 1.50 to 2.00 percent above the current average.
If your lender is satisfied that you can afford to repay the loan, then you’ve crossed the first “hurdle” towards a successful loan application.
Stable Employment
The second hurdle is to prove that your income level is secure. This can be demonstrated showing continuity of employment history. If you’ve recently changed to a similar job after a long stint in a previous position, that’s fine. But if you’re on probation or have undergone a major career change (from brain surgery to carpentry), lenders may want six or even 12 months of stability.
If you’re self-employed or on a contract, lenders take confidence in your future by looking at your past. Most lenders apply the rule of thumb of averaging the income you declared to the tax office over the past two financial years. However if there is a large disparity from one year to the next they will usually take the lower and add 20%. So the ideal situation is 2 years in current job with no wide pay discrepancy from one year to the next.
However if you can demonstrate a good stable career path with say no more than 3 employers over 2 years and no significant breaks ( eg 3 months in Europe ) then most lenders will accept 6 months in your current job and/or two years continuous in the same field. If you are on probation then it is less likely that lenders can obtain LMI lenders mortgage insurance and so 80% LVR will be maximum.
Security
If the bank is confident that you can service the ongoing loan, there’s still one more hurdle. The property that you purchase is used as the security for the mortgage. This means that the lender holds the title documents until you have repaid the loan. The quality of the security is very important to the lender and so they will pay close attention to the type of building ie: house, unit, studio, farm etc and the location.
Lenders need to consider the unlikely situation of you becoming unemployed, injured or on long-term benefits. The lender needs to be satisfied in this worst-case scenario that they can sell your property quickly for a sufficient amount to recover their loan. So a 3 bedroom house fifteen minutes from Melbourne might sell in 3 weeks where as a 3 bedroom house in Bourke might take 3 years. For this reason on normal residential the base limit is 80% of the property value (known as a loan-to-value ratio or LVR). Where as in other locations where property might not be so easily sold the base LVR may drop to 60% or lower. It is only possible to go beyond the base LVR when lender can obtain lenders mortgage insurance or LMI, – see below for more information.
Equity / Savings
This is closely related to security as equity is the difference between how much the property is worth and how much you are borrowing. So for borrowers with no existing property your equity is – your total deposit less costs. Since the mortgage insurers are involved in most loans over 80% ( there are only two insurers at this time in Australia) they want to know if you’re prudent with money or whether you tend to spend everything you get.
For that reason, they prefer all borrowers who wish to borrow more than 90% of the value of their property to have shown discipline and saved at least 5% of the value of their property purchase price. Don’t confuse savings with deposit as your deposit may come from various sources such as selling a car, or gift from Mum – while these can be used as deposit they DO NO QUALIFY as genuine savings. Before the GFC home loans were available to first home buyers with no savings at all – the only way that can be done today is with a parent who offers their property as security guarantors.