FAQ: The Orium Finance Team answer your top questions

Ask your broker: Your top lending questions answered

Curious about lending requirements, interest rates or lenders mortgage insurance? Check out our answers to some of the most common questions we’re hearing from clients at the moment.

Is now the right time to pay lenders mortgage insurance (LMI)? 

Generally the pros outweigh the cons when it comes to lenders mortgage insurance (LMI). With property prices growing so fast and outpacing income growth, you may be waiting for years before you are able to save enough of a deposit without utilising LMI. While you wait, you’re also missing out on the capital gains you might have achieved had you entered the market earlier.

Sure, LMI seems like ‘dead money’ but it quickly pays for itself once your property starts to increase in value. Consider that the LMI premium for someone purchasing a $1,000,000 home with a 10% deposit  is approximately $22,000, then the property would need to grow by 2.2% before you’ve recovered your costs. With most property markets around the country growing at a long term average of 5-6% per annum, it seems like paying LMI could be the smart play for most purchasers.  

Will interest rates go much lower?

Whilst we can’t say with certainty that we’ve hit the floor on interest rates, we’re certainly close to rock bottom.  It’s important to remember that banks have margins they need to make and COVID-19 losses to recover, so it’s unlikely they’ll be discounting further. That said, don’t rule out the prospect of promotional interest rate deals which last for a short time only. 

How are banks viewing bonuses and commissions in a COVID-19 environment?

While this is dealt with differently on a case by case, industry by industry and lender by lender basis, you generally can’t rely on your bonus or commissions to count as income in the current environment when seeking finance. 

Bonuses and commissions are being looked upon less favourably by the banks at the moment as they’re seen as less secure. With some bonuses held back or not paid during the pandemic, many banks are unwilling to bet on bonuses being paid and have taken the more conservative approach with this type of income.

What is responsible lending and what does it mean to me as a borrower?

Responsible lending consists of several practices to ensure lending is undertaken ethically and in the best interests of the borrower. In essence it really comes down to ensuring the borrower is able to service the loan should they be subject to mortgage stress in the future. 

The biggest impact of responsible lending requirements has been the push for further due diligence and scrutiny of the borrower’s spending and expenses. While this is a good thing for the industry and probably long overdue, it does slow down the process and impacts many people’s borrowing capacities. A lot of  people get into the habit of spending everything they earn, however faced with the responsibility of a regular loan repayment, they tend to adapt their spending accordingly. Under the new lending guidelines, banks often want to see a track record of saving or at least a strong explanation as to how a borrower can meet an additional financial commitment.

This is why when you’re working with a lender or broker you’ll now need to supply a lot of data and documentation including bank statements, proof of income and a breakdown of spending. It can take time for the bank to review and verify all of that information. 

What key items and red flags are banks looking for in an application?

One of the main things lenders will look for is spending behaviour in transaction accounts. What are your expenses? How much are you spending each month and on what? Regular recurring expenses such as school fees and car repayments will have an impact on your borrowing capacity, as they are not discretionary spending unlike a lavish holiday.

They’ll also look at any red flags like unpaid tax bills or previous defaults on your credit report. If you own a business, lenders will want to know if you are up to date with lodging your business activity statements (BAS). 

Lenders will also want to know your ability to service the loan which means they will be interested in your income and whether it is seen as secure and consistent. For business owners, they can run into trouble if their taxable income appears low in an effort to minimise tax. A good broker should be able to navigate this and explain the situation to the lender. 

Should I fix my rate or have a variable loan? 

Usually in a falling interest rate environment it is generally best practice to hold onto the variable interest rate as fixed rates tend to become less competitive over time. Whilst this might have been true a few years ago, the current fixed rates are typically 0.50% + cheaper than the variable rates. 

The downside risk of fixing your rate has been largely mitigated because we are at the bottom of the interest rate cycle. Therefore now is a great opportunity for many borrowers to consider fixing. For the current fixed rates to become uncompetitive, we would have to see a further fall in the variable rate in excess of 0.5%, which seems unlikely. 

Keep in mind, however, that if you’re looking to sell or upgrade your home in the near future, then fixing your rate often doesn’t make sense as banks will apply significant break costs when existing a fixed rate mortgage.

Remember that if you opt for variable rates they don’t just change when the cash rate changes, as banks don’t always pass on the savings!

Can I have a part fixed and part variable loan?

Yes, most banks will allow you to fix part of your loan and have the other part as variable. This is very common with borrowers who have access to large amounts of cash at any given time and wish to park that cash in an offset account, offsetting the variable portion of their mortgage. You can’t offset a fixed rate mortgage, so a hybrid mortgage consisting of fixed and variable can provide borrowers with the best of both worlds. 

Got a question of your own about lending or interest rates? Contact us to find out more.