What’s new in finance? Exciting NEW Low Doc options for investors
By Michelle Coleman
Our marketing team told us that last month’s survey revealed you wanted more information on the latest developments in lending products. So this month I’m back with some very exciting news that a number of our lenders have released 85% LVR Low Doc loans. This means many of our clients can now enjoy increased purchasing power because of the better leverage an 85% LVR gives you!
So this month I’ll focus on explaining:
- What a Low Doc loan actually is,
- What the new features and benefits of the NEW Cash Flow Mortgage™ are, and
- What are some of the features of our other 85% LVR Low Doc products
- How these new developments can benefit you…
What is a Low Doc loan and is it for me?
Historically most lending institutions have capped the Loan to Value Ratio (LVR) - the total borrowing divided by the total valuation of the property - on Low doc loans at 80%. However, now three of our lenders have launched 85% LVR Low Doc products. For those who are not familiar with the terminology, there are three categories of loans out there:
1) Full-doc loan: borrowers need to provide full documentation, including asset & liability evidence and income evidence;
2) Low-doc loan: borrowers provide less documentation, including asset & liability evidence (normally not as strict as full-doc loan), but when it comes to income, the borrower only needs to declare an income that can pass the serviceability test, lenders don’t actually verify the income. The interest rates are sometimes the same as full-doc interest rate for some lenders, but the majority of lenders will charge a slightly higher interest rate;
3) No-doc loan: borrowers provide almost no documentation. The borrower doesn’t need to state their asset and liability position and there is no need to declare any income to pass any serviceability test. This type of loans can go to 65-75% LVR, and interest rate are typically higher than full and low doc products.
Low-doc loans are mainly for people who are self-employed that can’t or are unwilling to verify their taxable income (although some lenders now also allow PAYG to do the same).
As I’m sure many of you are aware since financial market deregulation, lending has become a lot more competitive. Lending institutions are under pressure to offer more products and get more market share. That’s why we’ve started to see low-doc loans being institutionalized by all the banks and major non-bank lenders.
And the competition to come up with more compelling features on these products continues with the release of 85% LVR Low Doc products. It was only in early 2006 that many lenders started to release 80% No Doc products. A year on you can see that the intense competition for your business is creating a much more conducive environment for investors to invest in!
Features and Benefits of the NEW Cash Flow Mortgage™
The most exciting of these products is the new 85% LVR version of the Cash Flow Mortgage™. The Cash Flow Mortgage has been available in Australia for almost a year now. It has now been widely accepted and embraced by the mortgage industry and the investors market. There is not much more debate about whether this is a great mortgage product any more, the only thing left to debate is whether it is suitable for the borrower's circumstances. And this version could suit many more of our clients.
When it was first released in July 2006 the product was an 80% LVR product. This is still available; however the new version has some great improvements over and above the obvious benefit of the ability to borrow 5% more!
Many of our clients are attracted to Cash Flow Mortgage™ because of the rollover feature which prolongs the positive cash flow benefits (click here to find out how rollover works).
Well this feature of the new version of the Cash Flow Mortgage™ is even more attractive as lower capital growth is needed to maximize the cash flow benefits of the rollover feature.
What investors have always had to consider when analyzing this product was that if their property didn’t go up in value enough, the rollover won't work as effectively and their cash flow could become worse off. However as you can see from the comparison below the minimum capital growth requirement is now less than 6% to make the rollover work vs the original version when it was around 9%.
For an 85% CFM loan:
Property today: $500k;
Starting LVR: 85%
Maximum LVR at 2 year mark: 90% (3%, i.e. $450k)
Rollover amount: $450k
At 85% LVR, property value needs to be: $529,412 ($450k/85%)
Value increase for property over 2 year: $5.88% ($529,412 - $500,000)/$500,000)
For an 80%CFM loan, as a comparison:
Property value today: $500k;
Starting LVR: 80%
Maximum LVR at 2 year mark: 87% (i.e. $435,000)
Rollover amount: $450k
At 80% LVR, property value needs to be at: $543,750 ($435k/80%)
Value increase for property over 2 year: $8.75% ($543,750 - $500,000)/$500,000)
One other significant improvement is the ability capitalize the Risk Fee over the life time of the loan, which means that now you the borrower does not get hit with an upfront fee compared to the first version of the product.
Other 85% LVR Low Doc Options for investors
Two of our other lenders have now also released 85% LVR Low Doc products. Apart from the key benefit of being able to access more equity, each of them has slightly different features and assessment criteria. However, one of them has a fantastic feature where you don’t have to pay any Lenders Mortgage Insurance (LMI). This could save you thousands!
So what does this all mean for you and your investing?
We have always said that the reason you invest in property is because of the leverage that property finance provides you. Other asset classes will provide similar returns to property, but lenders do not allow you to leverage to the extent you can with residential property.
So Investors Direct now has three great new options available to our client’s that will allow you to do more with the funds that you have at your disposal.
All these new products have slightly higher interest rates than their 80% LVR counterparts. However, the thing to focus on is that unlike in the past where a 5% increase in LVR above 80% may cost you 2-3% more in terms of interest rate costs, the increase in interest rate on these products is very small indeed.
If you do the sums, the cost of slightly higher interest costs is by far exceeded by the ability to access 5% more of your asset’s value. It can provide you with even more cash when you need it…NOW.
The even better news is you don’t have to do the numbers! We’ll be more than happy to help you do your sums ;-)
With the markets in Brisbane, Melbourne and Adelaide on the move and their growth cycles underway, it may be worth your time speaking to us about your situation and whether or not these new products will suit your situation.
For our WA based clients these new product developments mean it might be worth your while considering refinancing now to purchase eastern states.
Our team looks forward to speaking to you soon!
Michelle Coleman
National Sales Manager
Investors Direct
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