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As an expat, understanding what’s happening in Australia with respect to obtaining finance can be challenging. You may have seen headlines about Australia’s Financial Services Royal Commission (which concluded in February 2019) and read articles about borrowers in hardship who did not understand the terms of the large loans they signed up to. In response, and taking into consideration COVID-19, lenders are taking their obligations far more seriously and the bar to obtaining finance is considerably higher than it was a few years ago.
When assessing a loan application, lenders consider the following key questions:
1. Does the loan fit lender policy?
2. What is the Loan to Value Ratio (LVR)?
3. Can you service the loan?
1. Lender Policy
Policies differ between lenders and not all of them have an expat policy. It’s worthwhile engaging a finance broker who is familiar with expat lending. Lenders who do provide finance to expats have their own requirements in terms of permitted LVR (see 2 below), percentage of income shading (foreign income is ‘shaded’ or rather, reduced, to allow for exchange rate fluctuations), and most lenders only permit PAYG applicants (no self-employed applicants) and principal and interest repayments (very few lenders permit interest only repayments), among other requirements.
2. Loan to Value Ratio (LVR)
The LVR describes the size of the loan you take out, compared to the value of the property being secured, expressed as a percentage. A lower LVR is seen as a lower risk to the lender. The calculation is: Loan Amount ÷ Valuation x 100 = LVR.
For example, if the property you wish to purchase (or refinance) is valued by the lender at $1,000,000 and you wish to borrow $800,000, the LVR will be 80%. The majority of lenders require a LVR of 80% or below, however they may consider a LVR above 80% with Lender’s Mortgage Insurance (LMI). LMI is payable by the borrower at the time of property settlement and serves to protect the lender if a borrower is unable to meet their mortgage repayments and the property has to be sold. For expats, most lenders now require an LVR of 70% or below, and LMI is generally not available should you wish to exceed the maximum LVR specified by a lender.
3. Can you service the loan?
After determining the LVR, the lender will assess whether you can afford the loan repayments. They will scrutinise your financial circumstances in detail, looking at your income, living expenses, assets, liabilities (other loans) and credit card limits. Each lender uses their own calculator to determine serviceability. What may service with one lender, may not service with another.
Lenders ‘shade’ foreign income quite considerably which, unfortunately, can make servicing for expats quite challenging, even with a substantial income. The majority of lenders shade income by 20% to take into account exchange rate fluctuations.
An increased focus on living expenses Since the Financial Services Royal Commission, lenders have significantly improved their processes to ensure that they meet their responsible lending obligations – which requires lenders to show that they have taken into account a borrower’s circumstances and ability to repay a loan. These improvements have led to greater scrutiny of living expenses. Your finance broker or chosen lender will ask you to fill out a detailed questionnaire with 13 expense categories (such as childcare, personal care, groceries, insurance etc).
The living expense information will be verified by your finance broker or lender against your bank statements and credit card statements (you will be required to provide up to six months of your most recent bank statements and credit card statements among other documentation as part of your application). If you are considering taking out a loan, understanding your household living expenses will improve your chances of getting a loan application approved efficiently and expediently.
Low interest rates and floor rates
While meeting the loan servicing test can be more challenging for expat borrowers, the flip side is that we are in a low interest rate environment and in mid-2019, a number of lenders announced changes to their loan serviceability assessment rates. Interest rate floors were reduced to around 5.5% (from over 7%), increasing the borrowing capacity for many home loan applicants. The concept of an interest rate floor was introduced in 2014 so that when assessing loan applications, lenders use a higher rate of around 5.5% (despite interest rates being as low as 2.29%) in order to ensure that should interest rates rise, the borrower can make loan repayments.
Why use a finance broker?
Given the complexities involved in obtaining finance these days, it is worthwhile building a relationship with a finance broker that you can trust, and who understands the various lender expat policies. Finance brokers now write approximately 60% of all home loans in Australia and can help you save time and money as they assist you with finding the most appropriate loan for your circumstances.
Amy Auden, Director of Yarra South Finance, is accredited with over 20 lenders, of which 15 lend to expats. She’s familiar with expat life, having lived in Hong Kong, Singapore and the US. Amy now lives in Melbourne, Australia. Contact her on email@example.com or +61 437 346 278. yarrasouth.com.au
**This article provides general information and doesn’t take into account your objectives, financial situation or needs. Consider whether it is appropriate for your circumstances and your full financial needs and requirements will need to be assessed prior to any offer or acceptance of a loan product. It does not constitute legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances. Subject to lenders terms and conditions, fees and charges and eligibility criteria apply.