Why lenders may use exposure limits to curb the size of your mortgage

Exposure limits are the maximum amounts that lenders will let you borrow, taking all your current debts into account. For property investors taking out a mortgage when they’re already paying off others, debt exposure can be a dealbreaker.

Depending on your income, savings, and credit score, lenders may offer you the loan amount you require to purchase your dream property. However, in some cases, they may restrict how much you can borrow based on the risk they’re taking in lending you a large sum. 

Do past loans affect how much I can borrow as a mortgage? 

Many Aussies have multiple relationships with a bank or lender. They may first open a savings account and then apply for a credit card offered by the bank before taking on larger debts like personal or home loans. If you’re investing in property, you may even approach them for multiple mortgages.

Each new debt taken out with a lender will increase your credit risk exposure. For the bank, exposure is the amount of money they stand to lose if you fail to repay your debts.

Most lenders try to reduce their credit risk exposure, because it minimises their chances of losing money. They often do so by placing a ceiling on the total amount they’ll allow you to borrow, or they may only lend you a smaller amount.

For example, suppose you previously took out a loan to buy a $1.5 million home, and now want to invest in a property worth $1 million. The lender you approach may have a debt exposure limit of $2 million, which effectively means you can only borrow $500,000, depending on your current loan balances. 

How else do lenders limit their exposure?

Two other methods that many mortgage lenders use to help limit their financial exposure are the Loan to Value Ratio (LVR) and the Debt To Income (DTI) ratio.

The Loan to Value Ratio (LVR) is the maximum amount a bank may be willing to lend you compared to the value of the property being purchased. Because a mortgage uses the property as collateral, a low LVR reduces the risk that the lender could lose money if the borrower defaults on the loan and the lender must repossess and sell the property.

Most lenders prefer that you maintain an LVR of 80 per cent or less. The lower your LVR, the more likely you are to qualify for some special home loan deals, such as lower interest rates or waived fees. You may still be able to apply for a mortgage with an LVR of over 80 per cent, but the higher your LVR, the more you may be charged in Lender’s Mortgage Insurance (LMI). This is an insurance policy that covers the lender (not the borrower) if the borrower defaults on their repayments. Most lenders pass the cost of LMI on to borrowers.

Your Debt To Income (DTI) ratio expresses how much money you owe compared to how much money you earn. This helps to give a lender an idea of your financial situation, and how much of your income should go towards servicing debts.

If you already owe a lot of money on your home loan, the lender may be reluctant to lend you more money to buy an investment property, as your income may not be strong enough to comfortably manage the repayments on both loans, especially if your circumstances were to suddenly change.    

Does Lenders Mortgage Insurance also have a maximum exposure limit?

The lender you’re borrowing from may not necessarily be the LMI provider (two popular LMI providers are QBE and Genworth), and each provider can have different credit exposure calculations. You may find that while you have low exposure as far as your lender is concerned, you could have high exposure from the LMI provider’s perspective. 

The maximum exposure limit for LMI can vary based on the number of securities, or properties, you have. If you paid LMI just for your home, your exposure limit would be lower compared to if you paid LMI for multiple mortgages. On the other hand, if you’ve already taken out a large mortgage with LMI, you may not find too many lenders willing to lend you more money - with or without LMI. For example, if you already have a 90 per cent LVR loan with LMI on a property priced at $1 million, you’re less likely to get a similar loan for another property.

What else do lenders factor into their credit exposure calculation?

You may be tempted to think that by applying for mortgages with different lenders, you can get around the maximum exposure limit. However, many Australian banks and lenders operate as groups (e.g. Westpac owns St.George, Bank of Melbourne, RAMS and BankSA), and calculate their credit risk exposure across the group. For this reason, you’ll need to check that you’re actually applying to a completely different lender and not to the same lender operating under another brand name.

Also, keep in mind that when you’re applying for a joint mortgage, lenders don’t calculate exposure separately, so borrowing as a family or in a group doesn’t give you access to a higher exposure limit. For example, suppose you’ve taken out a mortgage worth $1.5 million for your home with your spouse, and want to borrow another $1.5 million with a colleague to set up an office. The home loan of $1.5 million will be used to calculate your exposure limit. This will therefore reduce your capacity to borrow any additional amount, like to set up an office with your colleague.

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