Unit 2: Principles of Lending (Part 2) Flashcards
What is the Loan to Value Ratio (LVR) formula?
LVR = Loan amount / Asset value x 100
Example: Customer wants a loan of $600k to purchase a property valued at $750k.
LVR = 600,000 / 750,000 x 100
= 0.8 x 100
= 80%
What does the loan to value ratio (LVR) do?
Reflects the size of the amount borrowed compared to the value of the asset being purchased.
Is the LVR a primary measure of risk for a lender?
Yes
Generally, the longer the period of the loan, the _______ the monthly principal repayments will be (higher or lower)?
lower
What are the three credit term categories?
- Short term = < 12 months
- Medium term = up to 5 years
- Long term = up to 30 years
What 4 factors are generally taken into account to determine the appropriate loan term?
- Borrower’s age
- Capacity to repay
- Purpose of the loan
- Total interest to be paid over the life of the loan
What is the general maximum term for residential loans?
30 years
What is the general maximum years of the interest-only portion of home loans?
Generally max of 5 years, before needing to be renegotiated or converted to P&I
Is it enough to just check if a customer can repay a loan, or has enough security for the loan (as repayment is guaranteed)?
No, as lenders we look to future income or earnings to provide the source of repayment, not the forced sale of security. We need to consider all aspects of the application.
What 3 things do we need to establish for repaymet ability?
- Repayment terms
- Customer agreement
- Flexibility of repayments
Do we need to look at customer’s income and financial outgoings when considering their loan application?
Yes, absolutely.
Income can include: salary, investment incomes, tax benefits, etc.
Outgoings can include: mortgage, phone, internet, clothing, vehicle, etc.
How do banks generally verify income for employed people and self-employed people?
Employed: last 4-8 weeks pay slips and PAYG tax documents
Self-employed: financial statements (and current trading results) of last year years… includes balance sheet, profit/loss statements.
Why do we verify income?
- Ensure customer isn’t over financially committed (e.g., other loans).
- Validate information.
- Identify further questions to ask.
What 3 things must you consider when collecting information about a customer’s outstanding loan obligations, and why?
- Source of loan
- Other lending institutions
- Original amount of each loan
We want to know if the customer is borrowing from other organisations, if they’ve been rejected (and why), how much is outstanding, and when the outstanding amounts will be repaid.
