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.