The document summarizes the lending policies of banks in Australia. It outlines policies regarding maximum loan amounts and loan-to-value ratios that vary based on the size of the loan. It also discusses acceptable borrowers, income requirements, property valuations, debt consolidation, and unacceptable loan purposes. Key considerations for banks include borrower ability to repay, value of property collateral, and risk level of the loan.

1. LENDING
POLICY OF
BANKS IN
AUSTRALIA
BY – ANIL VISHNOI, NLU JODHPUR

2. Banking in Australia
 The banking sector in Australia consists of a
number of banks licensed to carry on banking
business under the Banking Act 1959, foreign
banks licensed to operate through a branch in
Australia, and Australian-incorporated foreign
bank subsidiaries. The banking system is liquid,
competitive and well developed.
 The Reserve Bank of Australia is responsible for
Australia's monetary policy. Monetary policy
involves setting the interest rate on overnight
loans in the money market („the cash rate‟). The
cash rate influences other interest rates in the
economy, affecting the behaviour of borrowers
and lenders, economic activity and ultimately the
rate of inflation.

3.  In determining monetary policy, the Bank has a
duty to maintain price stability, full
employment, and the economic prosperity and
welfare of the Australian people. To achieve
these statutory objectives, the Bank has an
„inflation target‟ and seeks to keep consumer
price inflation in the economy to 2–3 per cent,
on average, over the medium term. Controlling
inflation preserves the value of money and
encourages strong and sustainable growth in
the economy over the longer term.

4. Lending Policy of banks
 The banks & lenders mortgage insurers in Australia have specific
lending policies that they use while giving loans. Each lender has
their own policies and they are usually far more complicated than as
explained on this page
 Maximum loan amounts
Lenders have preferred maximum loan amounts for certain types
of borrowers. Loan amount limits apply on a “per security” basis and
vary based on loan product, loan purpose or security location. It
should be noted that the lender can choose to limit the proposed
loan amount for loans that pose a higher risk.
 95% LVR: $750,000 (some lenders consider up to $1,000,000).
 90% LVR: $850,000 (some lenders consider up to $1,000,000).
 80% LVR: $1,000,000 (some lenders consider up to $2,000,000).
 70% LVR: $2,000,000 (some lenders consider up to $5,000,000).
 60% LVR: $2,500,000 (Unlimited loan sizes are available from
lenders without exposure limits).

5.  Maximum LVRs
The “Loan to Value Ratio” (LVR) is one of the major indicators of risk and a primary
consideration that banks take into account.
 The LVR is the loan amount as a percentage of the purchase price or the security
valuation amount, whichever is less. The maximum LVRs referred to in this policy are
considered to be the preferred LVRs for many lenders. LVRs may vary by product,
loan purpose and security location.
 In the case of construction loans, the LVR is determined on either of the cost (land
value plus tender) or the on-completion valuation, whichever is lower.
 In the case of a refinance or an equity release, the LVR is the loan amount as a
percentage of the valuation only.
 It should be noted that the lender may choose to limit the LVR of the loan based on
the individual specifics of an application or the particular loan product.
 The maximum base LVR is 95%, or up to 97% including capitalised LMI. Note that
some lenders allow LMI to be capitalised above 97% LVR.
 The only exception to this is when you are using a guarantor. You are entitled to
borrow 100% LVR, when using your parents property as additional security for the
loan.

6.  Exposure limits
 The maximum exposure (total loans to one borrower or group of borrowers)
preferred by lenders to any one borrower is $2.5 million. Exposures above this
amount may be considered on a case-by-case basis. It should be noted that lenders
are often conservative when assessing loans to borrowers with a total exposure over
$1 million.
 Acceptable borrowers
 Natural person (over the age of 18)
 Company
 Trustee of a Trust
 Any multiple or combination of the above borrowers.
 Excluded borrowers include: Limited liability companies, associations, churches,
clubs, minors (under the age of 18).
 Restrictions apply to: Borrowers of convenience (borrowers that receive no benefit
from the loan),non-residents (borrower residing outside Australia or who is living in
Australia but is not anAustralian Citizen or Permanent Resident).

7.  Loans to companies & trusts
 For company loans, all directors and shareholders (excluding „Notional Directors‟) must provide
unconditional joint and several personal guarantees.
 In the case of a trust where the trustee is a company, directors and shareholders are required to
provide unconditional joint and several guarantees, as mentioned above.
 The trustee of the trust must always be the borrower in its own right and as trustee for the trust.
E.g. Smith & Co Pty Ltd IIOR & ATF The Smith Family Trust. This requirement applies to
both family, discretionary and unit trusts. Hybrid trusts are generally not accepted for home loan
applications (Some exceptions may apply).
 In some cases the directors of the trustee company may be the borrower, whilst the trust is the
mortgagor. These applications are assessed on their merits.
 Borrowers of convenience
 A borrower of convenience is defined as a borrower that is added to the loan application to
provide serviceability and/or security but does not receive a tangible benefit from the loan
transaction. Borrowers must have a beneficial interest in the loan transaction either by way of
joint ownership of the security and/or dependence on the mortgagor in a marital or defacto
relationship context.
 It is not acceptable for a person to be joined in a loan simply to provide income support for
servicing, or simply to provide added security for another party to purchase a property. The
exception to this is with family pledge home loan applications.

8.  Non-residents
 For the purposes of this policy, a non-resident is deemed to be any person without permanent
residency
status in Australia, and/or any person who resides and is employed in another country. New
Zealand citizens living and working in New Zealand or permanent residents of New Zealand are
considered residents of Australia and are not treated as non-residents.
 Maximum LVR & Loan Amount
 81% – 95% LVR: Not available (Note that there are exceptions with some lenders).
 80% LVR: $500,000 (Note some lenders allow loans up to $2,000,000 at 80% LVR for non-
residents).
 75% LVR: $750,000.
 Borrowers must be high net worth, generally with net assets in excess of $500,000.
 Where one borrower is a citizen or permanent resident of Australia or New Zealand and the other
borrower is a non-resident as per the above definition, any proposal will be assessed under
normal policy and not under the non-resident policy above.
 In situations where non-rental income cannot be adequately verified, 100% of the gross market
rental income for the security property must be sufficient to cover the proposed mortgage loan
instalments, calculated at the current assessment interest rate.
 Where required, written evidence that Foreign Investment Review Board approval has been
granted, must be supplied.

9.  Guarantors
 Guarantors are required to complete a full application form including personal details, financial
position, employment details and sign the Lenders Privacy Act declaration.
 Where guarantor income is required to service the proposed debt, standard employment and
income policies apply, including income and employment verification requirements.
 For family pledge home loans the guarantor must not be a pensioner using their owner occupied
property as security for the loan. Note that some lenders do not have this requirement.
 Savings
 Borrowers who have saved a deposit are generally better prepared to deal with any difficult
financial circumstances that may arise. They have proven their ability to manage their finances
responsbiliy & live within their means.
 Genuine savings need to be evidenced in the following circumstances:
 Home loan >80% LVR: 5% genuine savings required.
 Investment home loan >80% LVR: 10% genuine savings required.
 Low doc loan: 20% genuine savings required.
 No genuine savings loan: No genuine savings are required (Note that this product is only
available from some lenders).

10.  Savings plans & rental purchase plans
 Savings plans allow the borrower to save the
deposit on a home, after approval of a mortgage.
Similarly, rental purchase type arrangements
enable the borrower to save the deposit whilst
occupying the security. These rental purchase
arrangements are commonly referred to as, wraps
or rent to buy schemes.
 Neither of these plans are acceptable for
mortgage insurance. Borrowers are therefore
restricted to loans of 80% LVR or less. Borrowers
may still get approval if they can provide evidence
of genuine savings outside of the savings plan.

11.  First home saver accounts
 First Home Saver Accounts is an initiative of the Australian Government,
aimed at assisting Australians aged 18 and over to save for their first home.
The government will contribute 17 percent on the first $5,000 (indexed) of
individual contributions made each year with a capped balance of $75,000.
 Funds saved in First Home Saver Accounts are acceptable as a form of
genuine savings.
 Employment & income
 Acceptable employment statuses are listed below.
 Permanent salary/wage employment (full-time or part-time) and Contract
employment:
 Minimum 2 years continuous employment in the same industry, or
 Minimum 12 months with current employer.
 Where the borrower is undergoing aprobation period, the loan application
will be assessed on its merits, as well as the strength of the borrower‟s
overall position.

12.  Serviceability
 Serviceability is the lenders assessment of the borrowers capacity to afford the loan. Each lender
has their own method of assessing serviceability. However, there are two main methods used:
 Net Disposable Income (NDI): This method is used to assess the borrower‟s ability to meet
regular fixed financial commitments. It calculates the funds left over (on a monthly or annual
basis), after tax, living expenses & fixed commitments have been deducted from the borrowers
gross income. This method is also known as the Uncommitted Monthly Income (UMI) method.
The minimum surplus ranges from $1 / month to 25% of the borrowers total monthly fixed
commitments.
 Debt Service Ratio (DSR): This method calculates the percentage of a customers gross income
that is used to service a debt. As a general rule, home loans with a DSR greater than 50% are
declined.
 Using a Servicing Calculator, proposed debt repayments (except those with a fixed interest
rate for 3 years or more) are calculated at the average standard variable rate of the four major
banks or the Lender‟s
standard variable rate (whichever is the higher), plus an interest rate buffer of an additional 1.5%
to cover interest rate movements and / or unexpected expenses.
 If the fixed rate term is 3 years or greater, the actual interest rate can be used to demonstrate
servicing (i.e. the additional 1.5% buffer is not required).

13.  Security
 Sale of the security property is the alternative means of clearing the loan debt, should the
borrower/s not be able to fulfil their repayment obligations. Therefore, the security must be
readily saleable to avoid a protracted selling period. As a general rule, this means the
property must be in a high demand location, be in good condition, have wide appeal to
potential buyers and have few or no restrictions on it being sold, such as covenants,
caveats, lease of life or if company title must not have rules saying “new buyer must be
approved by the other owners,” etc.
 Security location
 The Security Location Guide identifies property locations by postcode for a range of home
loan types, with varying loan amounts. The postcodes are broken up into groups based on
population figures obtained from the most recent census data, as well as other factors
including the geographic spread of the postcode, sales activity, and home prices.
 Note: some lenders still offer 95% LVR loans for properties located anywhere in Australia.
However, this depends on the level of activity in the market & whether there are sufficient
comparable sales to accurately assess the market value of the property.

14.  Cross-securitisation / Cross-collateralisation
 This is where the lender has more than one property as security for the loan. The
properties are all collateral for a single loan that often has multiple loan accounts.
This is generally easier to setup than mutliple loans secured by multiple properties.
 However, it can be very difficult to sell a property or increase the loan amount. Where
you wish to do so, usually all properties need to be valued & the lenders credit
department must approve the variation.
 In the event that you are unable to pay the loan, the lender may have a greater level
of control over your assets.
 All cross-collateralised applications must meet the following requirements:
 Security property must be common to all loans under the cross-collateralised
structure.
 Each mortgagor under the cross-collateralised structure must be either a debtor or
guarantor.
 Any guarantor on any loan within the cross-collateralised structure will be required to
guarantee all loans within the cross-collateralised structure.
 In the case of a third party loan: where a borrower is not a mortgagor, that borrower
must have a direct relationship to a mortgagor, with respect to control (i.e. company
where a mortgagor is a director).

15.  Consolidating debt
 Borrowers can consolidate their debt by combining their existing unsecured debts into their home
loan. Typically, individuals add their consumer loans such as personal loans, car loans, credit
cards etc into their home loan.
 As a consequence of debt consolidation, the borrower has only one monthly repayment, which in
many cases, may improve their servicing and reduce their commitment level.
 The risk of these applications is significantly higher than the risk posed by a standard purchase
orrefinance application with no cash out.
 The reason for this is that borrowers with significant unsecured debts are often living outside of
their means. If their spending habits do not change, then they risk being in the same situation
again in as little as one year after debt consolidation.
 As a result of the higher risk, additional approval criteria applies:
 Maximum 90% LVR.
 Maximum of four debts, including the existing home loan can be consolidated.
 Repayment history on all debts must not show any late payments, missed payments, over limits
or arrears fees for the prior six months.
 Where funds are released directly to the borrower, equity release parameters are to be observed.
 Home Loan Experts note: this type of application is considered high risk and is not readily
accepted by many lenders for loans that are >80% LVR.

16.  Home renovation loans
 Lenders can consider loan applications for a borrower wishing to renovate their home, or even
knock down and rebuild. These applications are assessed in a similar way to construction loans.
 The following additional approval criteria will apply:
 Maximum LVR of 95% of revised (on-completion) valuation. All improvements a valuation from a
registered valuer, that evidences the successful completion, prior to the final progress payment.
 Examples of acceptable home improvements include: replacement or major upgrade of kitchen or
bathroom, addition of swimming pool, garage or carport, extensive landscaping, upgrade or
inclusion of a concrete driveway and/or complete re-roofing of premises.
 If the current value of the security property is sufficient to support the proposed loan amount then
the funds can be released to the borrower & progress payments may not be required.
 Unacceptable loan purposes
 Loans for the following loan purposes are not accepted by lenders:
 Loans for development finance (construction of more than 2 dwellings on one block of land,
purchase of multiple blocks of vacant land in a sub-division, refinancing commercial facilities that
have been used to fund development finance or developers gearing up against residual stock to
fund next development).
 Vendor Finance (WRAP Finance).
 Refinance of debts to the ATO or other tax debts.

17.  Interest only loans
 An interest only loan allows the borrower to pay the interest
on the loan for the first few years, before reverting to a
standard principal and interest loan, over the remaining loan
term. These applications pose a higher risk as the principal
amount is not being reduced during the initial years of the
loan, therefore the LVR remains higher than that of a principal
and interest loan.
 Loans with an interest only period of less than 5 years are
generally accepted under standard lending policy.
 Loans with an interest only period of more than 5 years are
considered on a case by case basis and are limited to 90%
LVR.
 Lenders prefer interest only periods where the loan is being
used for investment purposes.

18. Thank You