Homes & Relocation Detail
Understanding Australian mortgages
Jenese Malone from PR Australian Properties lays out how the Australian mortgage system works for foreign buyers.
The mortgage market in Australia has become extremely competitive since the banks were deregulated in the 1980's. Before then the banks had the market to themselves with little competition between them. Today, with non-bank lenders such as Mortgage Originators, the market has become more flexible. People who wish to apply for a mortgage need to provide proof of identity – a photo-copy of passport or drivers license – proof of deposit – a photocopy of bank statement or shares certificates, etcetera to show they have access to the deposit – and also proof of income, tax returns from the past two years and three recent pay slips.
Full document loan
This is when the borrower can provide the adequate proof of income. In most instances what is required are the last two years tax returns, showing their income in their country and three recent pay slips.
Low document loan
If the borrower cannot provide adequate proof of income they may get this type of loan. The interest rate will be slightly higher and they need to self certify what they earn.
Some lenders will require a letter from an accountant stating income.
Non-Residential Loan
People who derive their money offshore will be given a non-residential loan. The interest rates are the same but the LVR (Loan to Value Ratio) on this is a maximum of 80 per cent and applies only if the borrower can show tax returns and pay slips.
Residential Loan
For people who derive their money in Australia a 100 per cent LVR is possible. Generally the person will have equity in another property which is being used as the deposit for additional properties.
Interest rates
Interest can be fixed or variable in Australia. The rate is the same as for non-residential or residential borrowers. Current mortgage variable rates range between 6.99 per cent and 7.85 per cent. Choosing to fix fees needs careful consideration as it alters the entire loan product and borrowers are often caught out paying more than if they had stayed with a variable rate.
It is not only the actual interest rate which people must take into consideration, it is the total loan product and what it offers, which unfortunately most people do not know to compare. Often people take on a mortgage with a lower interest rate without being aware of the hidden monthly or annual fees with that specific loan type. As at 28th July 2007 there is division amongst the experts as to if there will be another interest rate rise at the August meeting of the Reserve Bank of Australia.
Interest only loans
In Australia it is possible to take the mortgage as interest only for a five-to-ten year period. This means that instead of paying regular amounts of the principal they can save money for the first few years. The borrower is able to pay extra lump sums into the loan if they wish which is a better way to reduce the principal. If a person is buying property for investment then the Australian Taxation Department gives significant benefits against income which reduces the amount of tax paid out. There are no tax benefits allowed on the principal part of the loan so people can leverage themselves more effectively by not having to pay regular principal amounts. There is also no tax benefit for owner-occupier properties.
Debt service ratio
In Australia lenders have a responsibility to ensure that borrowers have a capacity to repay the loan and there is a D.S.R. (Debt Service Ratio) of 35 per cent between income and outgoings. Non-residential borrowers do not generally have any DSR considerations when borrowing in Australia as their deposit is higher than residential borrowers.
Residential mortgage types
A non resident can obtain a mortgage for a completed home, as well as off-plan and construction packages. If the property is house and land to be built then there will be drawn down interest during the building and the interest rate is slightly higher during that period If the property is off plan then the purchaser usually pays 10 per cent and will get their finance organised closer to the settlement time. It is important for purchasers to establish how long their lender will hold the loan offer open for. Many lenders will only hold the loan offer for 90 days. Generally, the borrower needs to provide updated financials closer to the time of settlement, with this type of facility.
Redraw facility
A non resident can organise the highest LVR and still pay more money into the loan if they wish to. This can be structured so they can have a redraw facility meaning they can access these funds as they wish to as long as they do not exceed their original Loan Value Ratio.
Upstamp facility
Some lenders will also offer an upstamp facility which allows them to change from non-residential status to residential status on arrival into Australia once they have an Australian Income. This means that they can access their original funds, for example 25 per cent, and any increased equity in that first property. The up stamp is more often offered by the mortgage originators than the major banks.
Contracts
Contract Law is not federal and each state has it's own contract definitions. Borrowers must establish the situation in the state they are purchasing in. Contracts can be either subject to finance or cash. People buying property in Australia can only buy old properties if they have permanent residence or citizenship. The Foreign Investment Review Board allows only 50 per cent of any project to be sold to non-residential buyers as well. Therefore non residents can not buy second-hand property. The exception to this is Integrated Resort status in Queensland which is generally golf course complexes in which hundreds of millions of dollars are being spent on infrastructure in that estate.
Taxation
If a foreign person is to invest in a property and rent it out then they will be able to claim significant tax benefits for that property. All interest paid is 100 per cent tax deductible on investment property, regardless of whether the funds are borrowed in another country or in Australia, any shortfall between costs and income, depreciation of construction is allowed at 2.5 per cent over 40 years, depreciation of fixtures and fittings, inspection costs can be claimed and a portion of the acquisition fees will be claimed. The total tax benefits can be accrued until eventual arrival into Australia or on resale to offset capital gains tax.
Australian credit rating
Often people believe that they will be establishing an Australian credit rating by opening a bank account in Australia. This is not the case. People who invest in property will establish a credit rating in Australia as off-shore credit ratings do not have any impact on lenders. Lenders usually require the borrower to have two years work history in Australia before advancing funds, so to invest in property before relocation they negate this as they will have established an Australian credit rating.
Fees
The two common added fees one can expect to encounter when arranging a mortgage is loan application fee; valuation fees; stamp duty on the mortgage (differs from state to state); mortgagee solicitors fee; Courier fees for mortgage documents and Power of Attorney for purpose of receiving notices in Australia. There will also be stamp duty on the property as well as stamp duty on the mortgage. Again this varies from one state to the other.
For more information on the Australian mortgage system:
PRIP
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