Seven years ago, when my family acquired our first owner occupied home we could barely afford the $400k we asked for. But the lender was happy to provide us with a loan of $750k! We knew that we couldn’t afford that much, so we stuck to our guns. This week, we saw a top 100 rich lister complain quite publicly about how he was unable to get a loan from a big 4 bank due to lack of servicing. This is a guy worth many millions. And one would think the lenders would fall over themselves to get his business onto their books. But that was not the case.
The lending market has undergone significant change in the last few years. And the change seems to be never ending from a broker’s perspective. A deal that would’ve sailed through any lender’s assessment team, now gets held up and often for frivolous reasons. Hence the need for an article like this on what a buyer can do to be prepared prior to lodging an application.
The APRA (Australian Prudential Regulation Authority) works hard at protecting the interests of depositors from financial institutions that it supervises. The big 4 banks and Macquarie fall in this group and they’re limited to their exposure to any one market (i.e. investors, business or owner-occupied borrowers) and so on.
The fact is, the residential housing market is a significant size of the Australian economy. And it is only through a robust property market that states can balance their budgets. There is also a seeming unlimited number of people that are in need of somewhere to live, especially so in the big capital cities.
There is still demand for borrowing, but with tighter restrictions, fewer people actually qualify for the loans that they want. In the past, lenders had a focus on what assets clients have to use as security. Where now, the focus has changed to the amount of cash left at the end of the borrower’s month. This is where the rich lister mentioned above falls short. He is unable to demonstrate that he has sufficient cash left, after expenses, at the end of each month.
As a client, it is very important that you know some key figures, as it pertains to your situation. A finance broker can work with you to get to the bottom of the numbers. But it is good for you to know this, going into the process.
- What is your net (after-tax) income?
- The deductions that are coming off your salary – weekly or monthly?
- Your living expenses? Details are important.
- Can you explain all of your expenses?
- Do you have credit cards with high limits that you don’t even use that you could close?
- Afterpay is a liability that needs to be declared.
- What is your credit score?
It never ceases to amaze me how little people actually know about their own finances. From deductions on payslips to cash withdrawals at the casino ATM. The lenders want to know as much detail as possible, as they want to limit the risk to their funds as much as possible. They will go through every line of your credit card and bank statements. Blacking out a line is an absolute no-no, which may result in an immediate decline, as well as a hit on your credit file.
The finance brokers use a detailed living expenses form, which separates out essential from non-essential or discretionary expenses. Many clients are surprised to find out how much they spend a month on coffees, wine and cigarettes.
Top Tips for preparing Finance:
- Engage a finance broker early on in the piece. A broker will complete a quick assessment and be able to advise you on what it is lenders are looking for. This could mean the difference between getting a loan starting with 3 or a 5.
- Get control of your finances quickly. The lenders will go back up to 6 months on your statements to see what expenses were incurred. If you go with your current bank, they may consider past conduct going back years, not months.
- Know how much cash is left at the end of your month. For a lower rate, lenders will want to see a pattern of saving weekly or monthly.
- A 20% deposit allows you to borrow without having to pay LMI – Lender’s Mortgage Insurance. The clients with smaller deposits pay this to protect the bank from the client defaulting on the loan. It can be tens of thousands of dollars and it can be capitalised over the term of the loan. Just be aware that this is money not going towards reducing the loan. There are still lenders offering 95% finance, though this type of lending would typically result in a higher interest rate and LMI.
- The lenders all have niche areas i.e. there is only one lender that will look at small apartments, there are only a couple of lenders that will use commission as a regular source of income, some lenders are terrible at dealing with income from short term contracts, others are great. Not all lenders accept ABN’s that have been registered for only a short period of time, they insist on 2 years of financials. If you are renovating property for a living, this can be catastrophic in terms of getting finance for your projects.
- Get professional advice, so you don’t end up copping a decline on your credit file or worse, lose your deposit. Looking up in Google will show you several instances of applicants having lost their deposit due to a policy change or false promise.
We have seen second tier lenders pick up volume at the expense of the big 4 and Macquarie Bank. Many of these lenders offer rates more competitive than the big 4 and some of these are only accessible through a finance broker.
When it comes to war stories, we have many and this is where experience counts. We have saved clients thousands of dollars and only recently saved a client from losing a deposit just shy of $300k! It wasn’t easy and the lender they went with initially, which gave them approval to proceed, withdrew their offer the week before settlement.
Be prepared beforehand, get a good team behind you to help you through the pitfalls, so you can focus on the big picture stuff and leave the professionals to do their job.