All By Myself
Sydney Morning Herald
Wednesday July 9, 2003
Recent changes have made it easier for the self-employed to find a home loan, reports Christine Long.
When you're self-employed and hunting for a home loan, it can be tough jumping through all the hoops presented by financial institutions. Usually you need several years of tax returns for both the business and your personal income.
The good news is that's changing. These days there's no need for contractors or the self-employed to start a paper war when they want to take out a home loan.
Many lenders, including majors such as ANZ, Commonwealth and St George, offer a low- or no-document home loan alternative.
These products allow people like Peter Lindgren, a self-employed commercial agent, to borrow without providing all the usual accompanying documentation (see "Home Alone" at right).
The lender will take into account your credit history, but a no-doc loan may simply require you to sign a declaration stating you can afford to repay the loan, while a low-doc loan may also require you to sign a declaration stating your income.
The loans may be restricted to those self-employed for a minimum of two years (or, in the case of contractors, continuously employed for 30 months in the past three years). But some will lend to the newly self-employed.
As Brad Seymour, the head of product and marketing at Wizard, explains, such loans recognise the changing nature of work.
"People's circumstances are really varied today, with income sourced from self-employment, permanent part-time, freelance and contract work, as well as intermittent full-time work, broken to raise families."
Not so long ago people in these circumstances had very little choice when it came to a home loan, beyond the non-conforming lenders.
Bill Rankin, the lending director at Smartline Home Loans, says their products often came with a lot of restrictions. Rates were generally 1-2 per cent higher than traditional home loans, application fees were higher and the maximum loan size may have been as low as $300,000.
In addition, the loans were often available only to self-employed people with substantial equity in their own home or other assets who wanted to buy an investment property. However, with the influx of other lenders into the market, it has become more competitive, he says. There are now about 30 products, providing borrowers with plenty of choice on rates, features and loan sizes.
Rankin advises the self-employed to make sure they are not paying a premium for their loan if they have a good credit history.
"If you're simply a self-employed person with no credit problems, you should make sure the product you are getting is standard or close to standard," he says.
Kathlene Jones, the research director at Cannex, says many now have features associated with traditional loans, such as redraw, the ability to make extra repayments salary crediting and 100 per cent offset.
Be aware, though, the approach taken by lenders to this corner of the market may vary considerably.
The Commonwealth Bank, for instance, will not lend to first home buyers, while other institutions still primarily lend to those buying an investment property.
Check the lender's policies on rates, fees and charges. As the table shows, some will charge higher rates if the borrower does not have a clean credit record.
St George offers a low-doc product at the same rate as its standard variable rate product (6.57 per cent), but it places tighter restrictions than others on the maximum loan-to-value ratio.
Michael Leach, the head of home loans at St George, says there are no professional package discounts on its low-doc product and it has a maximum loan-to-value ratio of 65 per cent.
Others will lend up to 80 per cent of the purchase price of the property, but the rate may be higher and you will need to take out mortgage insurance.
You may wish to refinance relatively quickly, so take careful note of any exit penalties. Collins, ING, the Rock, Wizard and Bluestone all impose penalties if you refinance within the first four years, while AIMS and Loancorp charge exit penalties in the first five years.
These penalties can vary from a flat fee to a percentage of the initial loan amount and they may be imposed on a sliding scale, decreasing for each year the loan
is held.
Others, such as Adelaide Bank, take more of a carrot approach by automatically reducing the rate to the standard variable rate when the borrower has several years of a good repayment history.
Borrowers may have to produce financial documentation before the lender will reduce the rate.
The information the borrower supplies can also affect the amount the institution is prepared to lend.
At Wizard, its Fastdoc 80 product allows someone who has been self-employed for at least two years and who is prepared to sign an income and affordability declaration to borrow up to $600,000, with a maximum loan-to-value ratio of
80 per cent.
Its Fastdoc 65 product has no minimum self-employment period and only an affordability declaration must be signed, but the maximum loan size is $300,000 and the maximum loan-to-value ratio is
65 per cent.
Borrowers wanting to take out larger loans or those with a poor credit history may have to turn to the non-conforming lenders.
Alistair Jeffery, the chief executive at Bluestone Mortgages, says it will lend up to $3 million to a borrower and up to $2 million per property.
It has no mortgage insurance requirements, but these loan sizes invariably mean paying higher rates. It charges from 6.99 per cent to 10.5 per cent. It also requires more documentation than other providers, including six months of bank statements.
Someone with some history of credit impairment who takes out a large loan and provides a relatively small deposit will pay the highest rate, says Jeffrey.
Institutions may also place restrictions on the property they will lend against. Bluestone, for instance, will only lend on an apartment if the block is no more than 10 storeys high and is at least five years old.
Commercial property, rural property and vacant land are also commonly excluded from these loans, says Rankin.
HOME ALONE
When Peter Lindgren, a self-employed commercial agent, tried to refinance the loan on his two-bedroom unit in Lindfield earlier this year, he found it hard going.
Even though the 37-year-old had 50 per cent equity in the unit he bought in 1998 for $235,000, he found it difficult to get finance under what he describes as the banks' "tick and flick" method of assessing loan applications.
Several of the banks he contacted wanted at least three years of tax returns before they would even look at refinancing, he says.
"It was difficult to provide everything they needed, when they wanted it."
However, having just reached the end of a five-year fixed period on his loan, he was determined to refinance.
"I was paying 2 per cent more being in the fixed loan, because I got it in 1998," he says.
In the end, with the help of a Smartline Home Loans mortgage broker, he managed to refinance with a low-doc loan from the Police Credit Union.
"It was very competitive. The rate ended up being 6 per cent and I got an offset account as part of the product," he says.
All he had to do was guarantee his income, and the refinancing process took just three weeks.
"Usually it would take more like four to six weeks," he says.
© 2003 Sydney Morning Herald
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