HM Finance has direct access to an extensive range of residential lenders, such as the “Big Banks”, as well as non-traditional lenders who lend funds for residential properties where the traditional loan lenders don’t. Private lenders are typically more flexible and may not require mortgage insurance. They will consider all aspects of the home loan transaction outside of the boxes in which the major banks operate for their lending criteria. They will still lend to borrowers who have poor credit history, pervious defaults, cash flow problems, no financials (known as “low docs”). If the proposal makes sense, we can help! HM Finance is experienced in the finding the best deal for borrowers in a whole range of situations including:
- Complex structures
- Complex income analysis
- Large home loans (over $2million)
- Structured finance
- Non-conforming finance solutions
- Completed stock
- Residential properties with DA approval
- Vacant land
A low doc (or low documentation) residential loan is a type of home loan that can be approved without the normal income verification requirements. Low doc residential loans are for those who are self-employed and /or unable to prove their income through traditional means, such as tax returns or financial statements. Self-employed borrowers are normally required to have a valid ABN that has been running for at least two years and is registered for GST.
What this usually requires is a signed income declaration and reduced income evidence often in the form of BAS, business account statements or an accountant’s declaration. Banks will accept this as proof of income without the need to see tax returns and other financials. Self-employed people are seen as a higher risk by banks, who tend to be more conservative when assessing self-employed loan applications.
The requirement for paperwork could go two ways – potentially, the paperwork associated with these loans could include the last two years’ tax returns and assessments as individuals and their business, two years’ financial statements and, in some cases, BAS statements or interim accounts. Conversely, with a low doc loan, you may only be required to state your income on a form, provide reduced income evidence in the form of BAS, business account statements or an accountant’s declaration and that is it!
The main reason to use a low doc loan is because you cannot prove your true income. For example:
- You may not have up to date tax returns.
- Your income may have increased since your last tax return.
- You may have large deductions such as depreciation which are not a real expense.
- Your company structure may be too complex.
- You may have distributed income to family members from your trust.
Some other businesses such as restaurants, taxi services, tradesmen or retail outlets receive most of their income as cash which doesn’t show up in their tax returns. Obviously if they were to show their tax returns to the lender then they would be declined as their income would appear too low to service the debt.
Since changes to legislation in 2007 to the Superannuation Industry Supervision Act (SIS Act), if you have a SMSF, your Fund can borrow funds to purchase a property – beit residential, retail, commercial, rural or with specialised use or zoning. This borrowing is conditional on an acceptable structure being used to manage the fund and handle the funds being borrowed.
Essentially, a Security Trustee will purchase a property on behalf of the Fund and in doing so, it becomes the property holding’s legal owner, holding it in trust for the SMSF (as the beneficial owner). The SMSF provides an equity contribution from the Fund’s assets and borrow the balance of the money.
The Basics of a SMSF Finance Facility
- A SMSF loan is to a SMSF to assist in the acquisition of a property that is eligibly income producing
- The money borrowed is fully applied to the purchase of an asset
- The asset is held in trust and the SMSF acquires a beneficial interest in the asset
- The SMSF has the right to acquire legal ownership by finalising payment – by paying out any debt owing
- The SMSF loan facility is a “Limited Recourse” – meaning that the lender cannot touch any other of the SMSF’s assets other than the property held as security against the loan.
- A SMSF Residential property is generally – up to 80% LVR and up to 30 year term
- A SMSF Commercial property is generally – up to 70% LVR and up to 20 year term
- Member/s of the SMSF cannot reside in the residential property, but can purchase a residential property that they intend living in when they retire (subject to the property being transferred out the SMSF)
- No vacant land can be purchased – with the exception of working rural land where there is an income derived
- A redraw facility is not available
- All property purchases must be on a stand-alone basis
- An existing asset can be refinanced providing it meets SIS Act requirements
- No leveraging of existing property is allowed. However, you can borrow to repay existing SMSF loans plus costs.
Benefits of a SMSF
- Maximum of 15% tax rental income
- Expenses, including interest may be claimed as tax deductions by the super fund
- At this stage, there may be no capital gains tax on the sale of the property if sold after retirement
- A maximum of 10% capital gains tax on the sale of properties held for longer than one year
- Greater investment choices and control over your future
- The SMSF can pay out or reduce the borrowings at any time (subject to terms of the facility)
- Through gearing, the SMSF can acquire properties greater in value than the net worth of the Fund
- All other SMSF assets are safe and cannot be touched by any other lender – due to recourse provisions in Section 67 (4A) of the SIS Act
can afford the debt.
Second mortgages are sometime required by borrowers to get funds quickly, or get additional funds that their primary lender is unwilling to provide. There are also ties when the existing mortgage is secured at a competitive rate and the borrower may elect to secure additional funds at a cheaper rate than going through a re-financing exercise.
Since the Global Financial Crisis (GFC), there has been pressure on not exceeding certain loan to value ratios (“LVR”) – especially on commercial properties and specialised securities. Borrowers may be able to amply cover servicing the debt, and lenders may ask for additional investment to lower the LVR. One way is to second mortgage and relieve pressure on the primary lender.
Second mortgages can be structured to assist investors to acquire properties for either investment purposes or where “value add” opportunities are available. HM Finance can offer second mortgages with up to 80% LVR with very competitive pricing.
Bridging Finance is used with a temporary cash flow problem arises, such as a period between buying one property and selling another. Bridging loans are a short-term funding solution that generally has a slightly higher interest rate than conventional mortgages, which reflects that the lender is taking a risk on the uncertainty of the existing property’s pending sale. The lender provides the funding on the basis that the property will be able to be sold quickly.
For example, many people fund themselves in the situation of buying a new property while simultaneously buying a new one. They may have to complete the purchase, but the funds from the sale may not have eventuated due to, for example, a delay in settlement. When this occurs, a lender can provide bridging finance – using as security the existing and the soon-to-be purchased properties. These kind of loans are generally a) interest only and, b) less than 12 months in duration.
As part of the number of lenders to which HM Finance has access, there are private mortgage funds – genuine lenders looking to lend for property based transactions including owner occupied and investment properties as well as certain construction and sub-division loans.
HM Finance’s relationships with these lenders are particularly valuable to consider, as many banks have strict rules and policies relating to property and construction lending. We have experience in proposal preparation for our contact base and can offer private lender alternatives.
Private finance lending may assist in circumstances, such as:
- An urgent settlement is pending
- Cash flow problems
- Credit history issues – like defaults and judgements
- Financial data is not available when it is needed or serviceability is not evident
- Current loans are in arrears
- Overseas resident with no demonstrable local ability to service a facility
- Issues with the security of the property
- Location of the property
- Receivers has been or are about to be appointed
- ATO tax debts are to be paid urgently
- An existing lender is forcing an exit
- Incomplete construction project and the existing lender is unwilling to fund to completion.
Short term loans are specifically designed to help facilitate urgent settlements.
Delays in obtaining urgent funding from traditional sources, such as banks can result in a loss of income, business and potentially the loss of the deposit of a property if a settlement does not occur on time. Short term finance is designed to assist in these circumstances, to be able to settle within days, not months or weeks.
Short term loans (also known as “caveat” loans) are typically 1 – 12 months in duration and whilst they are normally secured against a property, business assets and other assets, such as cars, boats and jewellery can be considered as security.
A family pledge is, in essence, members of a family becoming a guarantor for a loan. They can use their own equity in their home to provide security for a portion of the loan amount. This is designed to lower the LVR of a loan, through increasing the amount of assets involved in the loan.
This can save a significant amount of money by reducing or eliminating the need for lender’s mortgage insurance – this insurance is generally paid on loans that exceed 80% of the property value. It’s a way of helping borrowers get their properties faster.
The family pledge can be limited to a finite amount guaranteed and the borrower and the guarantor can request that pledge be released (subject to approval) once the LVR requirements are met.
Building a home is a complex process that involves multiple parties including builders, contractors, lenders, solicitors, accountants, quantity surveyors and the council. With so many people involved in the process, there is always the possibility that things may go wrong. As a result, it can also be exceedingly complicated to obtain finance.
Because of the number of players in the process, it is difficult to get the correct amount when applying for a loan. The loan amount may be incorrect or it may be delayed, due to constant amendments.
So, before the lender allows you to begin construction, you & your builder will need to provide them with the following documents:
- Signed building contract
- Council approved plans
- Construction certificate (NSW) or Building permit (VIC) or Decision notice (QLD)
- Builder’s Insurance (certificate of currency)
- Builder’s Indemnity / Public Risk Insurance ($5 million minimum for most lenders)
You can either send these to the lender, prior to the first progress payment request OR with the first progress payment request.
For your final progress payment request, the lender will usually send a valuer to the property to confirm that work has been completed as per the contract & plans provided If there is any unfinished work then the lender may withhold payment until the work is completed.
You may need to provide additional documents such as:
- A certificate of occupancy from the council,
- A copy of your building insurance with enough cover to replace the building. This copy must also include the name of the lender, on the policy, and
- Other documents as per normal, such as a progress payment request, as well as an invoice from your builder.