Deciphering Common Lending Jargon In The Home Loan Industry
If you are a home owner, you may already be familiar with these terms.
However, if you are new to home loans, then this is something that you need to be aware of as it plays a vital role with regards to your approval.
The three key terms we will discuss in this post are:
- Debt To Income ratio (DTI)
- Loan To Security ratio (LVR)
- Lenders Mortgage Insurance (LMI) or low deposit fee.
Let’s decipher and explain for you what they mean so you can better understand each of them.
1. Debt To Income ratio (DTI)
Lenders set their lending appetite and risk ratio based on your income and how much loan you can afford without sacrificing your lifestyle.
Banks do not want you to be in financial stress and they also want their money back as well, which is why they set up this ratio.
With most lenders, they are willing to offer you a loan of up to 7 times your household income and recently due to COVID-19 a few lenders are setting up their DTI ratio up to 6 times your household income.
This may differ between owner occupied property and investment property, in addition there are a few lenders that offer loans up to 9 times your household income.
2. Loan To Security ratio (LVR)
Most new home loan customers may get confused with Loan To Security value ratios assuming that the purchase price is the value of the security.
In fact, lenders consider it with other factors as well.
Banks have their own independent valuer who goes to the house physically and inspects the property.
The valuation is based on:
- Land size
- House size
- Number of bedrooms
- Quality of inclusions in the house
- Recent sales in the same or neighbouring suburbs for similar land and house offerings.
Only after considering these factors would they conclude their valuation with supportive sales figures in the report.
When we say loan to security ratio what we mean is that banks look at how much would be the total loan against the property valuation.
Sometimes the valuer may under value the property as compared to the purchase price and sometimes they may over value it when compared to the purchase price.
3. Lenders Mortgage Insurance (LMI)
Banks do not want to risk their investment without insurance on the loan that they offer you.
The difference is:
- Up to 80% of the loan amount, the bank pays the premium.
- Once it goes over 80%, the bank will want you to pay the premium.
Recently, a few lenders have waived the LMI fee for LVR of 85% and with a few professions, you can qualify for the LMI waiver policy up to 90% of LVR.
The LMI charge is increased on a pro-rata basis, the higher the LVR, the higher your premium.
To give you an indicative figure:
- If you borrow up to 90% of the loan on your property, you can expect your LMI premium to be from $8K-$15K.
- If your LVR is between 90-95%, you may expect an LMI premium of between $15K-$25K.
- If your LVR is between 95%-98% then it may be above $25K-$30K.
This is also called a low deposit fee.
LMI cost may vary from one lender to another based on their agreement with the insurance company.
Some lenders may have their own LMI policy or pricing.
You Have Options
You have options on this premium and how you want to pay, most borrowers capitalise on the base loan which increases the loan to the security ratio.
As long as it is a serviceable and acceptable DTI, there is no issue on approval on this type of loan.
However, all LMI deals are subject to acceptance by the insurance company.
Keshab Chapagain
Mortgage Broker
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