Bank loan rules regarding PPOR

[FairDune]

Hi folks,

Firstly, apologies if this is a repeat question (I searched the forums, but haven't found a thread discussing this topic specifically).

My question is regarding bank rules regarding PPOR:

Is it true that if (most?) banks agree to lend 95% of the property value, they require that the buyer use the property as a PPOR (i.e. reside in the property he/she buys)?

The implication of this is that if the borrowing is 90% or less, the property can be bought as an IP.

If this is true, what do the laws/rules say? I have a pre-approval from a bank that explicitly (verbally only, through the customer service personnel) forbids buying a property as an IP because I can only come up with a deposit of 5% at the moment.

Please shed some light.

Thanks in advance.

 

[Peter_Tersteeg]

I have a pre-approval from a bank that explicitly (verbally only, through the customer service personnel) forbids buying a property as an IP because I can only come up with a deposit of 5% at the moment.

Firstly, this isn't a pre-aproval. It isn't anything and not even worth the phone conversation you've had. Every broker has stories about the client they 'rescued' because a bank reneged on a verbal assurance.

To answer the other questions. There are no laws at this point in time restricting what LVR a lender can purchase for what purpose. The restrictions come about from each lenders own risk tolerance and exposure to different markets.

There are lenders that will lend 95% for investment purposes and some that won't. Lenders consider this high risk in all cases and the generally define investment property as higher risk than PPORs. As a result you'll find that lenders will put restrictions on IPs at 95% such as:
* A few won't touch it at all.
* Most have various criteria that you may or may not meet. Some require a pre-existing relationship with borrowers, others require at least 10% equity in another property, etc.
* Many will charge higher rates (often to the point where you wouldn't consider it).

In all cases, the LMI premium for a 95% loan is monstrous. Often the difference between a 90% lend and a 95% lend is the bank lends an extra $2 and then takes $1 back in premiums. I've literally seen cases where the difference in funds actually handed over for the purchase was less than $5k, it often equities to under 2% of the purchase price.

 

[Terry_w]

Is it true that if (most?) banks agree to lend 95% of the property value, they require that the buyer use the property as a PPOR (i.e. reside in the property he/she buys)?

No, this is not true.

 

[Jamie M]

You can get 95% IP loans. There just aren't many lenders doing them and they're really just 92% loans with the LMI added on top to 95% (lenders like BWA are an exception - they will do 95% + uncapped LMI....and some will go up to 97% inclusive of LMI).

Generally speaking though - anything above 90% is credit scored more harshly and there's usually weird little requirements (you may have to show 10% equity in other property for instance).

My usual advice to clients who want a high LVR IP loan is to aim for no higher than 90% (88% is better due to the LMI fee reducing). At 90% - most lenders are keen to do business.

Cheers

Jamie

 

[Redom]

No 'laws' stopping it, but it is very difficult to get approval and would need a strong file.

The way our prudential system works is that APRA goes and gives a quiet word to individual lenders to get their house in order. They tweak policies behind the scenes, rather than going and legislating minor changes in the lending environment. Broader structural changes to competitive dynamics may require legislation, but things like changes to I/O, LVR's, lending policies, tend to be done behind the scenes.

Its rare that its market wide (macro-pru), generally APRA works by overseeing individual banks balance sheets and lending practices and telling that bank to adjust their behaviour. Its unusual for the Aussie regulator to come in and make broad macro changes to lending behaviour that applies to all lenders. E.g. its unlikely they'll go and punish ANZ by having forced restrictions on investor lending as a result of Macquarie's higher proportion of investor lending.

In terms of 95er lends, it is becoming more and more difficult over time too, with the main insurer treating this harsher with each passing day. Getting an I/O, investment loan at a 95% LVR and through Genworth today is going to be a challenge. At this LVR, the insurer generally needs to sign off on it and that could be a deal breaker.

As Pete mentioned, pricing for the LMI at 95% loans is often a show stopper anyway.

 

[FairDune]

Thanks to all for the replies - @Redom, @Jamie M, @Terry_w, @Peter_Tersteeg.