Foreign Investment and Lenders Mortgage Insurance
There is no denying the fact that Australia is the place to be if you want the best of culture, lifestyle, and even investments. We talk about common property investment mistakes here.
The land down under remains to be one of the world's most accessible places to do business, recently placing 14th of the 190 countries in the annual ranking by the World Bank.
It is no different story when it comes to real estate – in fact, Australia's property market witnessed a frenzy a few years ago, as investors flocked to the highly-valued cities for property investments. However, foreign residential real estate approvals started to dwindle over the recent years, on account of tighter regulations and slowing property prices. This does not mean investors should hold back, given that the current slowdown is but a phase the market has to undergo as it moves through the property cycle.
If you are a foreigner and you are planning to buy a piece of real estate in Australia, there are specific rules and regulations that you have to understand to ensure a smooth process. While the process might seem tricky to navigate, it is very understandable once you get a good grasp of the foreign investment framework the government uses in approving applications.
You will likely be charged Lenders Mortgage Insurance (LMI) if you need to borrow more than 80 percent of the purchase price of your new home.
On the plus side, that means stumping up for LMI could help you fast-track your dreams of homeownership by reducing the amount you need to pull together for a deposit. But there are some essential things you need to understand about it first.
From what LMI is to how to avoid it, here’s the lowdown.
What is Lenders Mortgage Insurance?
First and foremost, don’t mistake LMI for Mortgage Protection Insurance, which covers your mortgage repayments in the event of your death, disability, sickness or unemployment.
LMI is there to protect your lender – not you – in case you default on your home loan repayments.
Lenders mortgage insurance is insurance that protects the bank in the event of a buyer default. The easiest way to explain it is to compare it to a person insuring their car. In the event of an accident or theft, the insurance company will pay out the car owner to either fix the car or buy a new car. LMI is similar in that it pays out the bank should the borrower default on the mortgage and the bank makes a loss.
The cost of LMI may need to be paid upfront in addition to your deposit, or it might be added to the total of your home loan and could be paid off as part of your monthly mortgage repayments.
When do I need Lenders Mortgage Insurance?
LMI is generally applicable to loan-to-value ratios (LVRs) above 80 percent. The LVR is the percentage of the money you need to borrow compared to the purchase price of the property.
Lenders usually charge LMI if your deposit if your LVR is above 80 percent. However, some lenders may allow LVRs up to 90 percent depending on your profession, the industry you work in, and an array of credit assessment variables.
How much does it cost?
The amount of LMI you have to pay will vary depending on how much you’re borrowing. The lower your deposit is, the higher your LMI will be. You can use an online calculator to get an indication of how much LMI you may need to pay.
The LMI premium is payable at settlement by the lender. This is usually passed on by the lender as a cost to the borrower. The cost varies depending on the lender, how much is borrowed and the size of the deposit.
The premium may be able to be included as part of the loan amount or paid upfront on settlement. Your lender can provide details of the likely costs after you have applied for the loan. On refinancing, LMI may be payable again (especially if you are increasing your loan amount).
Keep in mind that borrowing to cover other costs, such as stamp duty, may push your LVR higher. That means your LMI might go up, too.
What other factors affect the cost of LMI?
The cost of LMI may also increase if you’re buying a property as an investor rather than as an owner-occupier. This is especially true if you’re using your investment property rather than equity in your own home to secure the loan. LMI may also be more expensive if you’re self-employed or have only worked with your current employer for a limited time.
Finally, an insurer may even consider you at higher risk of defaulting – and therefore charge more LMI – if the deposit you’re using is based on a gift or one-off payment rather than on a history of regular savings.
When do you need to pay for LMI?
Because the cost of LMI is initially met by the lender and then passed onto you, it doesn’t work like most forms of insurance where you pay a monthly premium. Instead, it is calculated at the start of your loan and then usually rolled into the total cost of your home loan. Your mortgage broker or home loan provider will talk to you about setting this up when you start discussing your loan.
How to avoid lenders mortgage insurance
There are ways to avoid LMI, or at least minimise your costs.
The best way to avoid LMI is to save a deposit that’s at least 25 percent of the purchase price of the property you want to buy. That way, you may have enough to cover stamp duty and other costs.
You may also be able to get around it if someone – typically one or both of your parents – is willing to act as a guarantor for you. This means they provide your lender with a limited guarantee using their property as security for the new mortgage.
Your guarantor is then liable for an agreed, guaranteed amount of your loan in the event of a default. However, they will need to have sufficient equity in their home, so they don’t incur LMI when supporting the guarantee.
If neither of these options is realistic for you, remember that a little extra can go a long way. LMI increases with your LVR, and sometimes you only need to add a few hundred dollars to your deposit to keep your LMI from jumping into a higher category. That’s why it’s essential to be aware of your LVR status.
For advice on Lenders Mortgage Insurance and everything else to do with home loans, call 13 19 20 to speak with one of iSelect’s qualified mortgage brokers.
Keep your loan to value ratio below 80%. If you have a 20% deposit (LVR of 80%), you don't have to pay LMI. In other words, save a bigger deposit to avoid LMI.
Take out a family guarantee. A family guarantee or family pledge is when one of your family members guarantees part of your loan with their property. They can usually nominate how much to pledge, and this is then added to your deposit amount.
Get a shared equity agreement. This rare financial arrangement allows a third party (a family member, lender or government organisation) to contribute some of your purchase costs. In exchange, the contributor receives a portion of your equity when you sell. A shared equity agreement can help you avoid LMI by increasing your deposit size.
QBE and Genworth are the two biggest LMI insurers in Australia. Some lenders provide their own LMI. It's not possible to compare lenders' mortgage insurance providers because lenders generally have an exclusive agreement with one insurer.
Benefits of LMI
LMI provides greater access to homeownership, particularly for low income, low equity or higher-risk borrowers who might otherwise have difficulty obtaining a home loan.
These borrowers could obtain a loan that would otherwise not be available or to get a loan much sooner than they would be able to if they had to save for a larger (more than 20 percent) deposit.
By using LMI, lenders can pass on this risk to a mortgage insurer, which enables the lender to offer the same loan amount but with less of a deposit. This, in turn, may lower the cost of a loan on the basis that lenders may elect not to charge a higher interest rate.
Which nationalities are allowed to borrow in Australia?
Some countries have tax legislation that makes investing in Australia unfeasible. Our Australian banks and lenders have provided us with a list of countries that they believe to be acceptable for home loan applications.
We recommend that you consult your accountant before deciding to apply for an Australian mortgage.
- Austria (subject to conditions)
- Belgium (you may need to pay Withholding Tax in Belgium)
- Hong Kong
- New Zealand (special mortgages are available for NZ citizens)
- The Netherlands
- The United Kingdom (UK)
- The United States of America (USA)
Finance for residents of other countries is available on a case by case basis at interest rates above 10%. Australian ex-pats who are not living in one of the countries listed above are eligible for lower interest rates.
Which currencies are preferred?
It’s much easier to get approved if your income is in one of the below currencies:
- Australian Dollar (AUD)
- Canadian Dollar (CAD)
- Chinese Yuan (CNY)
- Danish Kroner (DKK)
- European Union Euro (EUR)
- Great British Pound (GBP)
- Hong Kong Dollar (HKD)
- Japanese Yen (JPY)
- New Zealand Dollar (NZD)
- Swedish Kroner (SEK)
- Singaporean Dollar (SGD)
- Swiss Franc (CHF)
- United States Dollar (USD)
Some select lenders will lend for the following currencies. However, higher interest rates will apply:
- Bahrain Dinar (BHD)
- Brazilian Real (BRL)
- Bruneian Dollar (BND)
- Chinese Yuan (CNY)
- Indian Rupee (INR)
- Indonesian Rupiah (IDR)
- Omani Rial (OMR)
- Macau Pataca (MOP)
- Malaysian Ringgit (MYR)
- Mexican Peso (MXN)
- Norwegian Krone (NOK)
- Oman Rial (OMR)
- Papua New Guinean Kina (PGK)
- Philippine Peso (PHP)
- Qatari Riyai (QAR)
- Samoan Tala (WST)
- Saudi Arabian Riyal (SAR)
- Solomon Island Dollar (SBD)
- South Korean Won (KRW)
- South African Rand (ZAR)
- Sri Lankan Rupee (LKR)
- Taiwan New Dollar (TWD)
- Thai Baht (THB)
- Tongan Pa’anga (TOP)
- Turkish Lira (TRY).
- United Arab Emirates Dirham (AED)
- Vanuatu Vatu (VUV)
- Vietnamese Dong (VND)
How do they calculate borrowing power?
The lender that we apply with will complete a ‘serviceability assessment’ to work out how large of a loan you can afford to repay
The method that they use is much stricter than what they usually use with Australian citizens living in Australia.
Most lenders will use
- 80% – 85% rental income from the property you are buying.
- Our best lenders will use 100% of your foreign income as long as you’re in a strong financial position.
- In most cases, though, lenders will use between 60% and 90% of your actual income, so you may need to bear some money in Australia dollars (AUD) or be earning substantial rental income from Australian real estate.
- In some cases, overtime, allowances, commission and bonus income are ignored.
- Income from businesses outside of Australia (case by case basis).
- Australian tax rates, even if you are living in a country without income tax (some exceptions).
- Full repayments on your foreign loans to allow for interest rate movements (some exceptions).
That means that most lenders allow you to borrow much less than you can afford!
If you apply with the right lender, you’ll have your income accepted and a much higher chance of getting approved.
Can banks use my lower overseas tax rate?
The tax rates for several countries are much lower than Australian tax rates.
Finding a lender that will use your foreign tax rate means more of your income can be used so you can borrow more.
The biggest challenge is that the lenders that will use overseas tax rates will only do so if they can see tax withheld from your payslips.
This can be difficult if you’re living in Hong Kong, where you pay tax in instalments, or in the UAE or Saudi Arabia, where you don’t pay tax at all.
What are some lending restrictions in place for foreign investors?
There have been several changes in how banks and lenders deal with foreign investors. Big banks like ANZ and Westpac, for instance, have discontinued issuing loans to non-residents while National Australian Bank inflated its maximum loan-to-valuation ratio requirement for foreigners to 60%. However, there are a plethora of lenders and other financial players offering competitive home loan products.