These types of loans are generally suited to small business & self employed. Specifically these loans have been designed for borrowers who may not be able or do not want to substantiate their income for a variety of reasons.

Lenders of these loans require an applicant to evidence business activity, currently the primary test for most lenders is an ABN for 2 years & GST registration. In the absence of a full set of recent financials other substantiation may include letters from Accountants, BAS statements, proceeds from sale of assets & other business documents to support this business activity status.

There are some lenders operating in this space that do accept a lower set of criteria. Of course it makes more sense for investors to have access to a wider range of lenders, so our advice is to try and conform to the main level of lenders’ expectations.

Another important aspect to these types of loans involves mortgage insurance. In the Australian market today most of these types of loans are insured by a mortgage insurer. Depending upon the specific arrangements between the lender & the mortgage insurer these institutions cover all or part of the lenders risk in the event of a loan defaulting. In some cases the lender will absorb this fee generally up to certain Loan to Value Ratio (LVR) or loan value thresholds.

Relative to the number of products & lenders in the market there are very few mortgage insurers, in fact currently only 2 mortgage insurers dominate the Australian market place. It is these bodies that set many of the parameters, rules & guidelines for the finance industry including lenders at the higher LVR (where mortgage insurance is applicable) end of the finance market. Some of the major elements that are impacted by mortgage insurers include: security type, location (post code), maximum LVR & maximum lending amount.

Obviously these measures are used to minimize the risk & the extent of potential loss. Let’s face it lenders first aspect in lending money is “not to lose any money”. They do this by lending on assets that are not likely to go down in value & to lending to individuals & entities that have the capacity to repay their money!

Simon Turner simon@marquetteturner.com.au

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