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For a summary about non-conforming, or sub-prime lending, and who this type of lending is suitable for, first read our introductory page for Non-Conforming Loans
This article contains indicative interest rates and figures which are current as at the date of writing, October 2003. These will change over time, so please use them as a guide only and check with the individual providers for up to date quotes on interest rates, fees and charges.
This article comprises several sections:
WHAT IS NON-CONFORMING LENDING
Non-conforming lending, also known as sub-prime lending, has only sprung up as a significant market element since 1997. This has occurred because the conventional lenders have quite rigid lending guidelines which have failed to cater for the changing face of employment in Australia. People who often fail the banks lending criteria include:
In addition to catering to people in the above groups, non-conforming lenders can also help people who have less than the mandatory 5% or 10% deposit (plus costs) which the mainstream banks require.
There are 4 main non-conforming lenders in Australia at present:
These 4 combined now account for about 2% of the mortgage market here and their market share is growing.
The banks are themselves starting to realise the potential of this segment of the market. So much so that St. George Bank and the Commonwealth Bank, as at October 2003, are now offering their own Low Doc loans, although these still have more stringent criteria than many of the loans offered by the 4 main ncl’s.
INTEREST RATES, LVR’s, and PRODUCT TYPES
Interest Rates:
Expect to pay between 1% to 5% more for a non-conforming loan compared to a standard variable rate.
As rule, the bigger your deposit, the lower the rate of interest you will be charged. It all depends on the risk to the lender.
Here are some indicative figures for different Loan to Value Ratios (LVR’s):
If you are a self-employed borrower with a 20% deposit, and 2yrs+ of tax returns to substantiate your income, expect to pay under 7.5%.
A borrower with multiple defaults or a judgement on their credit history, with a smaller deposit and only seasonal employment will be considered a higher risk and may have to pay up to 10% or more. The lender will assess each case individually.
Interest rates for non-conforming lenders are higher as their arrears (the no. of loans they have that are 30 days or more overdue) can be 10% or more of their total loan book, compared with 1% or less for the main banks.
Despite the higher interest rate, one advantage is that no mortgage insurance is generally payable on non-conforming loans. The banks however, generally charge mortgage insurance on any loan over 80% LVR.
LVR – Loan to Value Ratio:
Some lenders will finance up to 100% or more of the property value, whereas others may not exceed 80%.
For example, a self-employed person who cannot prove their income with tax returns may still be able to borrow 90% of the purchase price, even if they have defaults listed against their name. Whereas a CentreLink beneficiary, or someone who has incurred multiple loan defaults or who is in part 9 or 10 bankruptcy may only be able to borrow up to 75% of a property price.
Non-conforming lenders are generally more concerned with why the defaults and judgements occurred, and what your current ability is to service the loan repayments, rather than with the fact that they have occurred.
Products:
Non-conforming loans come in the standard variable rate, fixed rate, split or combination loans, or home equity loan / line of credit varieties (see our article: The Different Types of Home Loans).
In some cases, no financials are necessary. The borrower is only required to sign a statement to the effect that they can afford to make the repayments on the loan.
As well as the 4 main players we mentioned above, a number of other mainstream lenders are coming on board with non-conforming lending products. However, there are some less scrupulous players that have entered the market.
The safest way for you to seek out a non-conforming loan is using the help of an ethical and independent mortgage broker who will look out for your best interests, compare lenders, and find the product most suited to your needs.
When seeking a loan from a non-conforming lender, here are some of the questions you should ask:
This last question is very important as many non-conforming lenders charge break fees if you refinance with another lender within 5 years.
People who obtain non-conforming lending usually do so because the banks won’t lend to them. However, as non-conforming loans usually have a higher interest rate, borrowers will often want to refinance to a lower rate as soon as possible.
Here are some indicative break fees for 3 of the 4 major lenders: (these are subject to change)
Liberty Financial
A flat fee of $1975 is charged if the loan is paid out within 10 years.
Pepper Home Loans
If the loan is paid out within:
Say you borrowed $150K at 8% over 25 yrs; your monthly repayment would be about $1160.
Therefore, if you refinanced within the 2nd year of the loan, you would incur a $3480 penalty.
GE Mortgage Solutions
If the loan is paid out within:
This article is: © Copyright 2003, Financially Free Pty Ltd. All rights reserved.
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