Why lenders may use exposure limits to curb the size of your mortgage

Why lenders may use exposure limits to curb the size of your mortgage

Depending on your income, savings, and credit score, lenders may offer you the loan amount you require to purchase your dream property. However, in some cases, they may restrict how much you can borrow based on the risk they’re taking in lending you a fairly large sum. They may suggest that you either take out a smaller loan or pay Lenders Mortgage Insurance (LMI). These suggestions are likely based on the lender’s estimation of how close you are to something called their exposure limit.

Exposure limits are the maximum amounts that lenders will let you borrow when taking into account all your current debts. For property investors taking out a mortgage when they may already have others, debt exposure can be a dealbreaker.

Do past loans affect how much I can borrow as a mortgage? 

Many Aussies have multiple relationships with a bank or lender. They may first open a savings account and then apply for a credit card offered by the bank before taking on larger debts like personal or home loans. If you’re investing in property, you may even approach them for multiple mortgages. Each new debt taken out will increase your credit risk exposure, often called exposure, to the bank. For the bank, exposure is the amount of money they stand to lose if you fail to repay your debts.

As may be expected, any lender will look at how to reduce their credit risk exposure, because it minimises their chances of losing money. They can do so by placing a ceiling on the total amount they’ll allow you to borrow, or they may only lend you a smaller amount. Suppose you previously took out a loan to buy a $1.5 million home, and now want to invest in a property worth $1 million. But the lender you approach may have a debt exposure limit of $2 million, which effectively means you can only borrow $500,000 depending on your current loan balances. 

The lender may conclude, based on the information you provide in your application or from your credit history, that you also don’t have sufficient income or borrowing power. In such circumstances, they may recommend that you only apply for a home loan with an 80 per cent loan-to-value ratio (LVR). For example, if you are looking to borrow $1 million, a home loan with an 80 per cent LVR would mean borrowing $800,000 and require you to put down $200,000 as a deposit. If you are happy to pay for LMI, you may be able to borrow 90 per cent LVR or more.   

Does Lenders Mortgage Insurance also have a maximum exposure limit?

LMI is another way in which lenders protect themselves from risk. However, as a borrower, you should remember that the premium, which is the cost you pay for LMI, can often make up a percentage of the loan amount and can be significantly high. Also, the lender you’re borrowing from may not be the LMI provider, and each provider can have different credit exposure calculations. As a result, you may find that while you have low exposure as far as your lender is concerned, you could have high exposure from the LMI provider’s perspective. 

The maximum exposure limit for LMI can vary based on the number of securities, or properties, you put up. If you paid LMI for just your home, your exposure limit would be lower compared to if you paid LMI for multiple mortgages. On the other hand, if you’ve already taken out a large mortgage with LMI, you may not find too many lenders willing to lend you more money - with or without LMI. For example, if you already have a 90 per cent LVR loan with LMI on a property priced at $1 million, you’re unlikely to get a similar loan for another property.

What do lenders factor into their credit exposure calculation?

You may be tempted to think that by applying for mortgages with different lenders, you can get around the maximum exposure limit. However, many Australian banks and lenders operate as a group, and they calculate their credit risk exposure across the group. For this reason, you’ll need to check that you’re actually applying to a completely different lender and not to the same lender operating under another brand name.

Don’t forget that LMI providers have separate exposure limits. So, if you plan to pay LMI on these loans from different lenders, you may want to confirm that the lenders don’t use the same LMI provider. 

Lenders don’t calculate exposure separately. Even if you apply for a mortgage with your spouse or someone else, your limit will be the same. For example, suppose you’ve taken out a mortgage worth $1.5 million for your home with your spouse, and want to borrow another $1.5 million with a colleague to set up an office. The home loan of $1.5 million will be used to calculate your exposure limit. This will therefore reduce your capacity to borrow any additional amount, like to set up an office with your colleague. Simply put, borrowing as a family or in a group doesn’t give you access to a higher exposure limit. 

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Learn more about home loans

What are the features of home loans for expats from Westpac?

If you’re an Australian citizen living and working abroad, you can borrow to buy a property in Australia. With a Westpac non-resident home loan, you can borrow up to 80 per cent of the property value to purchase a property whilst living overseas. The minimum loan amount for these loans is $25,000, with a maximum loan term of 30 years.

The interest rates and other fees for Westpac non-resident home loans are the same as regular home loans offered to borrowers living in Australia. You’ll have to submit proof of income, six-month bank statements, an employment letter, and your last two payslips. You may also be required to submit a copy of your passport and visa that shows you’re allowed to live and work abroad.

Will I have to pay lenders' mortgage insurance twice if I refinance?

If your deposit was less than 20 per cent of your property’s value when you took out your original loan, you may have paid lenders’ mortgage insurance (LMI) to cover the lender against the risk that you may default on your repayments. 

If you refinance to a new home loan, but still don’t have enough deposit and/or equity to provide 20 per cent security, you’ll need to pay for the lender’s LMI a second time. This could potentially add thousands or tens of thousands of dollars in upfront costs to your mortgage, so it’s important to consider whether the financial benefits of refinancing may be worth these costs.

What is a secured home loan?

When the lender creates a mortgage on your property, they’re offering you a secured home loan. It means you’re offering the property as security to the lender who holds this security against the risk of default or any delays in home loan repayments. Suppose you’re unable to repay the loan. In this case, the lender can take ownership of your property and sell it to recover any outstanding funds you owe. The lender retains this hold over your property until you repay the entire loan amount.

If you take out a secured home loan, you may be charged a lower interest rate. The amount you can borrow depends on the property’s value and the deposit you can pay upfront. Generally, lenders allow you to borrow between 80 per cent and 90 per cent of the property value as the loan. Often, you’ll need Lenders Mortgage Insurance (LMI) if the deposit is less than 20 per cent of the property value. Lenders will also do a property valuation to ensure you’re borrowing enough to cover the purchase. 

How do I know if I have to pay LMI?

Each lender has its own policies, but as a general rule you will have to pay lender’s mortgage insurance (LMI) if your loan-to-value ratio (LVR) exceeds 80 per cent. This applies whether you’re taking out a new home loan or you’re refinancing.

If you’re looking to buy a property, you can use this LMI calculator to work out how much you’re likely to be charged in LMI.

How can I avoid mortgage insurance?

Lenders mortgage insurance (LMI) can be avoided by having a substantial deposit saved up before you apply for a loan, usually around 20 per cent or more (or a LVR of 80 per cent or less). This amount needs to be considered genuine savings by your lender so it has to have been in your account for three months rather than a lump sum that has just been deposited.

Some lenders may even require a six months saving history so the best way to ensure you don’t end up paying LMI is to plan ahead for your home loan and save regularly.

Tip: You can use RateCity mortgage repayment calculator to calculate your LMI based on your borrowing profile

How can I get a home loan with bad credit?

If you want to get a home loan with bad credit, you need to convince a lender that your problems are behind you and that you will, indeed, be able to repay a mortgage.

One step you might want to take is to visit a mortgage broker who specialises in bad credit home loans (also known as ‘non-conforming home loans’ or ‘sub-prime home loans’). An experienced broker will know which lenders to approach, and how to plead your case with each of them.

Two points to bear in mind are:

  • Many home loan lenders don’t provide bad credit mortgages
  • Each lender has its own policies, and therefore favours different things

If you’d prefer to directly approach the lender yourself, you’re more likely to find success with smaller non-bank lenders that specialise in bad credit home loans (as opposed to bigger banks that prefer ‘vanilla’ mortgages). That’s because these smaller lenders are more likely to treat you as a unique individual rather than judge you according to a one-size-fits-all policy.

Lenders try to minimise their risk, so if you want to get a home loan with bad credit, you need to do everything you can to convince lenders that you’re safer than your credit history might suggest. If possible, provide paperwork that shows:

  • You have a secure job
  • You have a steady income
  • You’ve been reducing your debts
  • You’ve been increasing your savings

How much deposit do I need for a home loan from ANZ?

Like other mortgage lenders, ANZ often prefers a home loan deposit of 20 per cent or more of the property value when you’re applying for a home loan. It may be possible to get a home loan with a smaller deposit of 10 per cent or even 5 per cent, but there are a few reasons to consider saving a larger deposit if possible:

  • A larger deposit tells a lender that you’re a great saver, which could help increase the chances of your home loan application getting approved.
  • The more money you pay as a deposit, the less you’ll have to borrow in your home loan. This could mean paying off your loan sooner, and being charged less total interest.
  • If your deposit is less than 20 per cent of the property value, you might incur additional costs, such as Lenders Mortgage Insurance (LMI).

How much deposit do I need for a home loan from NAB?

The right deposit size to get a home loan with an Australian lender will depend on the lender’s eligibility criteria and the value of your property.

Generally, lenders look favourably on applicants who save up a 20 per cent deposit for their property This also means applicants do not have to pay Lenders Mortgage Insurance (LMI). However, you may still be able to obtain a mortgage with a 10 - 15 per cent deposit.  

Keep in mind that NAB is one of the participating lenders for the First Home Loan Deposit Scheme, which allows eligible borrowers to buy a property with as low as a 5 per cent deposit without paying the LMI. The Federal Government guarantees up to 15 per cent of the deposit to help first-timers to become homeowners.

What is Lender's Mortgage Insurance (LMI)

Lender’s Mortgage Insurance (LMI) is an insurance policy, which protects your bank if you default on the loan (i.e. stop paying your loan). While the bank takes out the policy, you pay the premium. Generally you can ‘capitalise’ the premium – meaning that instead of paying it upfront in one hit, you roll it into the total amount you owe, and it becomes part of your regular mortgage repayments.

This additional cost is typically required when you have less than 20 per cent savings, or a loan with an LVR of 80 per cent or higher, and it can run into thousands of dollars. The policy is not transferrable, so if you sell and buy a new house with less than 20 per cent equity, then you’ll be required to foot the bill again, even if you borrow with the same lender.

Some lenders, such as the Commonwealth Bank, charge customers with a small deposit a Low Deposit Premium or LDP instead of LMI. The cost of the premium is included in your loan so you pay it off over time.

How much can I borrow with a guaranteed home loan?

Some lenders will allow you to borrow 100 per cent of the value of the property with a guaranteed home loan. For that to happen, the lender would have to feel confident in your ability to pay off the mortgage and in the security provided by your guarantor.

Can I get a home renovation loan with bad credit?

If you're looking for funds to pay for repairs or renovations to your home, but you have a low credit score, you need to carefully consider your options. If you already have a mortgage, a good starting point is to check whether you can redraw money from that. You could also consider applying for a new home loan. 

Before taking out a new loan, it’s good to note that lenders are likely to charge higher interest rates on home repair loans for bad credit customers. Alternatively, they may be willing to lend you a smaller amount than a standard loan. You may also face some challenges with getting your home renovation loan application approved. If you do run into trouble, you can speak to your lender and ask whether they would be willing to approve your application if you have a guarantor or co-signer. You should also explain the reasons behind your bad credit rating and the steps that you’re taking to improve it. 

Consulting a financial advisor or mortgage broker can help you understand your options and make the right choice.

Can I get a NAB home loan on casual employment?

While many lenders consider casual employees as high-risk borrowers because of their fluctuating incomes, there are a few specialist lenders, such as NAB, which may provide home loans to individuals employed on a casual basis. A NAB home loan for casual employment is essentially a low doc home loan specifically designed to help casually employed individuals who may be unable to provide standard financial documents. However, since such loans are deemed high risk compared to regular home loans, you could be charged higher rates and receive lower maximum LVRs (Loan to Value Ratio, which is the loan amount you can borrow against the value of the property).

While applying for a home loan as a casual employee, you will likely be asked to demonstrate that you've been working steadily and might need to provide group certificates for the last two years. It is at the lender’s discretion to pick either of the two group certificates and consider that to be your income. If you’ve not had the same job for several years, providing proof of income could be a bit of a challenge for you. In this scenario, some lenders may rely on your year to date (YTD) income, and instead calculate your yearly income from that.

Why does Westpac charge an early termination fee for home loans?

The Westpac home loan early termination fee or break cost is applicable if you have a fixed rate home loan and repay part of or the whole outstanding amount before the fixed period ends. If you’re switching between products before the fixed period ends, you’ll pay a switching break cost and an administrative fee. 

The Westpac home loan early termination fee may not apply if you repay an amount below the prepayment threshold. The prepayment threshold is the amount Westpac allows you to repay during the fixed period outside your regular repayments.

Westpac charges this fee because when you take out a home loan, the bank borrows the funds with wholesale rates available to banks and lenders. Westpac will then work out your interest rate based on you making regular repayments for a fixed period. If you repay before this period ends, the lender may incur a loss if there is any change in the wholesale rate of interest.

What is a credit limit?

The maximum amount that can be borrowed from a lender, as per the home loan contract.