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What is a Non-Conforming Home Loan?

A number of banks across Australia have begun further tightening their lending criteria amid growing regulatory concerns around household debt and pressure from the royal commission to raise their lending standards.

This means getting approval for a home loan could now be even harder for new and existing borrowers.

For those who do not satisfy the criteria of their bank or lender, there may still be options available to access the property market.

One such option could be a non-conforming home loan.

What is a non-conforming home loan?

A non-conforming home loan is a loan offered to borrowers who don’t meet the standard lending criteria of their bank or major lender. These may include applicants who have a poor credit history, have previously declared bankruptcy or are self-employed.

How do they work?

These loans work similarly to typical home loans in that, if approved, they can be offered on a variable, fixed or split rate. Depending on the product, they can also come with a range of features such as an offset account, a redraw facility or the ability to make extra or lump sum repayments.

The main difference between a non-conforming and a standard home loan is within the fee structure and interest rate. In order to finance a non-conforming borrower, lenders will usually set a higher interest rate and higher entry and exit fees than a normal mortgage. This is to help lenders compensate for the risk they take when offering this type of loan.

The interest rate and fees offered will ultimately be determined by the lender based on the perceived level of risk and personal circumstances of the borrower.

If the borrower meets their loan repayments and over time is able to improve their credit rating, they may be eligible for a lower rate with the same lender or may have the opportunity to refinance to a cheaper home loan down the track.

Who can they assist?

A non-conforming home loan may assist people in the following circumstances –

  • Poor credit history – this includes people who have a record of late payments, previously declared bankruptcy, or a history of defaulting on their loans
  • Self-employed – they may be unable to show proof of income
  • Unstable or irregular income – those who regularly change jobs or work on a casual or contract basis
  • New migrant– people who have just moved to Australia and cannot verify their previous credit history
  • Have a tax debt
  • Retired
  • Recently started a new business or job
  • Have other debts to consolidate – credit card or personal loans
  • Have been refused credit in the past

What is the difference between a non-conforming home loan and a low-doc home loan?

A low documentation loan (low-doc loan), may assist people who are unable to provide standard documentation to apply for a loan, such as regular pay slips. These loans are generally only available to people who have a clean credit history, if self-employed have been so for at least one to two years, and do not want to borrow more than 80% of the property’s purchase price.

Non-conforming home loan
Low-doc loans may assist those who are self-employed and cannot provide standard documentation, such as regular pay slips, when applying for a loan. Source: Pressmaster (Shutterstock)

Non-conforming loans, on the other hand, could be accessible to a wider range of people who do not conform to the typical loan criteria, including those with poor credit history. These loans may also allow someone to borrow more than 80% of the property’s purchase price, although depending on the lender additional costs such as lenders’ mortgage insurance may be associated with doing so.

Important considerations

Before applying for a non-conforming home loan, look at the fees and interest rates on offer as they can be significantly higher than most traditional home loans. Also closely read the repayment conditions set out by your lender. In particular, look to see what the exit fees are if you decide to exit or refinance your loan within a certain period of time. These fees could be particularly high within the first few years. Speak to your lender to confirm what interest rates and fees may apply to your personal situation.

Make sure to be transparent and provide potential lenders with the full details of your financial situation, so they can find a loan which suits your needs and requirements.

Who can offer non-conforming home loans?

There are several lenders and mortgage brokers in Australia who specialise in sourcing and providing non-conforming home loans.

Compare your options before making any commitments.

Cover image source: Erica Smit (Shutterstock)

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