Guide to Sub-Prime/Low-Doc Loans
Low-doc loans, also known as sub-prime loans, are designed for borrowers who find it challenging to access traditional home loans. This quick guide to sub-prime loans outlines what is required for a low-doc application, who can benefit from low-doc loans, and the key things to know about low-doc loans.
What are low-doc loans?
Low-doc loans are designed for those who find it difficult to obtain traditional financing options. These may be home loans, personal loans, business loans, and other type of loan. As the name implies, low-doc loans require less paperwork and documents than traditional home loans.
Financing for Small Businesses
Sourcing adequate finance can be the difference between failure and successful growth for small businesses. The good news is that access to finance is not a major issue for most SMEs.
Accessing financing not a challenge for most
A report by DBM Financial Services Monitors and commissioned by the Australian Bankers’ Association and the Council of Small Business of Australia has found that only 6.6% of SMEs in Australia were worried about accessing finance. However, small businesses in certain industries found it harder to access finance than others.
Advantages of Using a Bridging Loan
Bridging loans are novel financing options that enable homebuyers to purchase a new home before selling their existing home. Also known as caveat loans, bridging loans are short-term loans that usually last for 3-12 months, rather than the decades associated with traditional home loans. Bridging loans are rarely effective for more than a year.
Features of bridging loans
Bridging loans are distinguished by a number of features. There is usually no option to roll over a bridging loan; the terms and conditions in this respect are usually final. Bridging loans are typically secured by a first or second mortgage to an existing home, and some lenders may give the option to pay off the loan earlier than the agreed term.
Many lenders do ask for upfront fees for bridging loans, and the loan-to-value ratio may be lower than for a traditional mortgage. For example, a lender might only offer a 65% loan-to-value ratio at maximum, but some lenders might be able to offer higher ratios.
Caveat Financing: What Is It?
Caveat financing refers to short-term loans that can last anywhere from two weeks to two years or more. Also known as bridging loans, this type of financing is typically used by home buyers to cover the period between the sale of an existing home and the purchase of a new home.
How caveat loans work
Caveat loans can be understood as a short-term second mortgage over the borrower’s existing property. Once the existing house is sold, the buyer or homeowner pays off the caveat loan using the proceeds from the property sale. Caveat financing can therefore be useful for homebuyers who are unable to sell their existing home before purchasing a new house.
Using a Private Lender to Buy Property
It is a common misconception that only banks and traditional financial institutions are able to provide mortgages, when in fact there are a number of non-bank lenders that are capable of providing just as good (if not better) arrangements for clients who do not necessarily want to deal with a bank.
Some of the advantages of using a private lender to buy a property, whether it be for investment purposes or for you to live in yourself, include:
Less red-tape
When using a private lender to buy property, there will generally be less paperwork and less bureaucratic hold-ups. This is due to private lenders generally having a smaller clientele and dealing with loans by looking at the underlying security on the property, as opposed to the big banks that receive so many applications that they are all bundled together and, during the first stage of approval, only look at surface figures.
When to Get a Second Mortgage
A second mortgage is a secured loan that acts as subordinate to a different loan against the same property (a traditional mortgage). The reason that second mortgages are considered subordinate is that if the borrower is unable to make repayments and so goes into default, the first loan/mortgage is the one that gets paid off first. This means that second mortgages are much more risky for the lender than first mortgages.
For this reason banks are usually unwilling to provide second mortgages to borrowers, which is where private lenders come into play. Here at Easy Settle Finance we understand that you may need to take out a second mortgage for various reasons, and we offer funding terms of up to 70-75% of the Loan to Value Ratio (LVR) of your property.
Private Lending Regulations
There is a common misconception among the general public that private finance lenders are not as trustworthy or as well-regulated as traditional financial institutions, when in fact they are subjected to similar Australian standards as banks. In fact, private lending is commonly referred to as “the oldest type of mortgage lending” because of its prevalence in the financial scene.
The different government bodies that are involved in regulating the Australian financial scene are ASIC and APRA.
APRA
The Australian Prudential Regulation Authority (APRA) is responsible for overseeing banks, general insurance and re-insurance companies, building societies, credit unions and most superannuation funds. APRA is also the Australian financial sectors national statistical agency.
Bank vs Non-Bank Lenders
For those who are looking for financing, whether it be for a second mortgage or for a business loan, it’s important to know that the banks are not the only option. Non-bank lenders are a great alternative to traditional financial institutions, and are governed by the same strict regulations that banks are legally bound to follow.
The definition of a non-bank lender is a financial institution that is privately owned and does not hold an Australian banking licence. Some of the advantages of choosing a non-bank lender over a traditional bank include:
What is Short Term Financing?
Short term financing, also known as bridging financing, primarily refers to loans that are given to borrowers for a period of up to 12 months. These loans are commonly sought after by businesses that require a quick injection of cash flow.
Some reasons why a company would get short term financing include:
- Long-term projects – If a business has taken on a long-term project that requires an initial cash outlay of more than they currently have available in cash flow, short term financing is ideal. The company will then be able to pay off the loan once the project is completed and the client has paid them.
The Right and Wrong Times to Use Bridging Finance
Many investors and home-buyers are aware of the benefits of bridging finance. However, a bridging loan should be used only in the right situations.
Here are some of the right and wrong situations from Property Reporter in which you should be using bridging finance.