The sub prime market in America caused all sorts of problems for the lending marker world wide, raising the cost of lending for lenders and of course increasing interest rates for the average borrower. We examined this in our last article on the sub prime market.

But the low doc market in Australia did not cause the same issues locally as the sub prime market did in the US.

Why?

In short the Australian Reserve Bank knew about the American sub prime market and long prior to banks being able to offer low doc loans was able to put a watch on the market and keep it under control.

About Low Doc Loans

“The term ‘Low Doc’ came about because borrowers need fewer documents to apply for a loan. Rather than provide payslips or tax returns, a borrower can simply state what their income is, a process called “self-verification”. Low-doc loans are primarily for self-employed people with limited records of their income.”

One of the controls over the low doc market has been the Australian Taxation Office. Unlike the IRS in America, the ATO has been watching the low doc market for people who understate the income on tax records for tax purposes and then ’self determine’ their income to be higher for the lender. With this stand over tactic the low doc market has not had the same free reign.

History

Back around 2005-7 when the low doc market was booming the Reserve Bank was more concerned about borrowers who used low-doc loans to overstate their income and get their hands on more money.

“In its biannual Financial Stability Review, early 2005, the Reserve put low-doc lending on its watch list, citing it then as a potential threat to the banking system.” This action perhaps protected many Australian property investors and home owners from the credit crunch that took hold from late 2008.

Some Banks More Exposed Than Others

The rural / regional banks in Australia, perhaps desperate to increase their market share, were the major protagonists of low doc lending. Banks such as the Adelaide Bank was at one stage lending over 30% on low doc with Suncorp around 10% with the majors staying somewhat in single digits.

Criteria In 2010 – Greater Stability

Today, in Australia, to be able to apply for a low doc loan you must be able to secure 20% of the equity yourself. Banks will no longer lend above this amount on a low doc loan giving the borrower and the lender a healthy buffer against loss.

If you look on the Portfolios Property site you will see in each of our property deals we supply both low doc and full doc scenarios with lenders requiring 20% or more equity for low doc.

Managing Lender Risk

The lenders also manage the risk by requiring mortgagees to take out lenders insurance. Mortgage insurance protects the lender from default and can cost over $10,000 on an average loan.

The financial difficulty and bankruptcy clauses in the US has allowed them to become a nation of entrpreneurs, but has also made it too easy to default.

The ‘get out’ clauses in Australia are much tougher than in the US. While lenders here went on a spending spree in similar proportions to America, the regulatory constraints of getting out of your debt in Australia is much tougher than overseas. In America lenders in many instances were simply walking away from the properties leaving the keys in the door and sometimes within months were back in another mortgage again.

Having a glut of properties worth nothing, with huge mortgages over them, and no one to buy them stung the American, and world financial system hard.

This situation hasnt been and is unlikely to be repeated in Australia with tighter controls.

A Good Strategy For Some

We recommend you review your loan types with Portfolios. Low doc loans are still available and in the right conditions can be very profitable.

Contact Portfolios for more information using the form below.

What if you could own your own investment property from just $32 per week? *

You could be realising return on invesmtent in excess of 700%.

Portfolios investment property of the month is Chinchilla.

Chinchilla, located in the Surat Basin Region is undergoing a massive build up of workers and their families, with a strong capital growth over the last 3 years and with the newly signed LNG deal with China this is a place to buy.

Chinchilla is located about 200km west of Brisbane with ever increasing job opportunities. Tightening rental availability has driven up rents sharply and will continue to do so.

The region has hospitals, schools and many amenities of normally much larger towns. Over $10 Billion being spent on Coal mines, a gas pipe line, rail links, gas exploration and waste water purification projects.

The government is also investing in rail in the Darling Downs, linking this region and its rich, diverse production with export ports such Gladstone.

According to investment sources the region around Chinchilla enjoys a 98% employment rate and a rental vacancy rate around 1%.

If you earn over $80,000 per anum we’d love to talk to you about this deal. We have turn key, brand new, four bedroom homes ready to be tenanted today.

If you earn under $80,000 then you might find this deal to be worth while with low property price entry, expected capital gains and expected rental hikes in the coming 12-24 months.

Chinchilla presents a great opportunity. You can view this and other properties in this region at www.portfoliosproperty.com.au or just go to Featured Properties.

Maybe something good has come out of the GFC, it appears people are thinking twice about refinancing their home to put on that extension or remodel the kitchen.

Instead statistics are showing that mortgages have swung in favour of people wanting to purchase investment property.

With the winding back of the First Home Owners Grant Scheme and three successive interest rate rises, AFG, Australia’s largest mortgage broker has seen a drop in the number of people financing to either buy their own home or refinancing to improve it.

Whilst the property market on the face of it is continuing to climb and sales are increasing brokers are acutely aware that the market is still a little hesitant following the GFC that dominated the 2009 agenda.

The January figures show that property investors as a proportion of mortgages written continue to hold steady making up 33.7% of all mortgages written the January period.

At Portfolios we believe that it makes economic sense to build your investment in property before being excessive with your own needs. This economic activity has encouraged Portfolios diversification into property sourcing for our clients as the property investment market not only remains strong but continues to grow.

Focussing on investment property finance and sourcing, we have seen a steady increase in activity in property investment both in our business and across the market further backing up these statistics. With Portfolios, our focus is financing for investing in property so you can be sure that leading into 2010 you are will be well placed in the market with us.

At Portfolios we encourage you to review your situation and find out how easy it is to start building your investment property portfolio with us. It is obligation free and could set you on the path to financial freedom.

Simply fill out our Client Portfolio Review and we will call to arrange an appointment over the phone.