Ability to service a loan the key for those receiving payments, says lender
Just because your client receives workers income protection payments it doesn’t mean they can’t qualify for a loan, although it’s not a straight-forward process, according to mortgage industry experts.
According to Home Loan Experts’ senior broker Jonathan Preston (pictured above left) the terms of the loan vary in accordance with the individual’s situation, however, approaches from borrowers in this situation were uncommon and he’d handled only two or three such loans in the past five years.
“We do get quite a lot of inquiries where people are receiving income protection and are already nearly 65 years old and most policies go to 65 years old,” Preston said.
“They want to buy a property at say age 55 or 60 using that income, however if the applicant doesn't have other income or a very strong exit strategy, the loan term will be very small and many of those don't end up proceeding because the borrowing power and repayments are much higher on such a short-term loan.”
Generally, lenders want to line up the loan term with the expiry of the income protection.
He said for example if the applicant is 45 and the payment is set to continue until the borrower is 65, the lender may want to cap the loan at a 20-year term.
“They might rely on a return-to-work letter instead if available,” Preston said.
The borrower would need an exception to the policy such as a strong exit strategy not to have to line up the loan term.
“Most insurers will require an ongoing review and a number of banks don't accept that.”
Preston said banks such as the Commonwealth Bank of Australia and Westpac, as well as some non-banks, would offer loans to borrowers on workers' income protection payments, while 80% LVR or higher might be considered by some lenders.
“In some cases, up to 80% of workers income protection payments might be deemed as acceptable income; depending on the applicant's overall circumstances,” Saoud said.
“Following a comprehensive assessment of the circumstances surrounding the receipt of income protection or work cover compensation, including the duration of the compensation, and the likelihood of returning to regular duties within a tentative timeframe, we have successfully assisted some clients following a workplace injury.”
Saoud said there were three key factors when considering a client’s circumstances – capacity, character, and collateral.
“For example, our flexible approach involves evaluating the client's capacity to service the loan – providing insight into their ability and means to repay.
“We also apply our flexible approach to assess the character of the applicant, considering factors such as their employment history, creditworthiness, and past loan repayment track record.
“Finally, when evaluating the collateral or asset's security, we’re looking to gain a comprehensive understanding of the loan size relative to the asset's value.”
Saoud said if brokers had client that didn’t tick the boxes for whatever reason or had experienced a significant life event, “give it the non-bank test”.
“If Pepper Money can help, we will.”
Pepper Money’s half-yearly results released in August showed the company had shifted its mix of business to non-conforming lending (near prime and specialist mortgages) and this highlighted the strength of the broker market in being able to assist customers banks had turned down.
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