Over the past year, the RBA has reduced interest rates to the lowest point on record.
Some first-time investors might find a false sense of security in this figure and not pay enough attention to finding the best long-term
lender for their new property.
Over the past 22 years I've written over 5,254 loans and I can tell you focusing purely on interest rates is a dangerous mistake.
My expertise is in helping property investors find lenders that can provide the structure
to suit their long-term goals - we're never looking for the lowest interest-rate.
Today I want to help you avoid some costly mistakes and go behind the scenes to show you how a professional mortgage broker chooses the best lender for ultimate long-term financial security
Busting The Myth: Are brokers just chasing commissions?
Most lenders pay the same commission, it’s in the range of 0.5 – 0.6% of the settled amount. And some don’t even pay any reoccurring income for 12 months.
So common sense will tell you that no broker is going to get rich by chasing the highest commission.
So where do they start?
Each broker is a little bit different. I will start with a "fact find" where I'll ask you a host of questions about your goals and objectives.
The clearer you are, the better your chances of finding a loan tailored to your situation.
Some typical questions to start the discussion are:
- What are your objectives and reasons for investing in real estate?
- Next three years, what are you looking to achieve?
- What are your longer-term plans post five years?
- What books, seminars have you read or attended?
- Whose if any methodologies are you following?
- Then there are all the questions about employment, age, dependants and your existing statement of position.
On average, this takes about 40–50 minutes and may take place in-person or over the phone. There is a lot to be found in the answers and a good finance strategist will listen attentively and should also challenge you on some answers.
After the "fact find" comes a process of elimination.
Elimination Round One: What do you have for collateral?
The biggest factor in a lender's decision to accept the property as security is property type and location.
If you're planning on buying a standard home in the suburbs of a major capital city then this is a mute point.
But let’s say that it’s a residential property in a mining town. It is well documented that this sector is easing, and we’re seeing a softening in valuations and rents. We are also seeing risk ratings in these areas going up too - hence not all lenders like mining towns.
Lenders that fit the bill progress to round two.
Elimination Round Two: What is your contribution to this transaction?
How much you are looking to borrow against the value (also known as the Loan to Value Ratio)?. Cheekily, most people say they want 100% finance and we get that, but in reality the lender is going to want to know how much skin the borrower will have in the deal.
It goes without saying a borrower putting in a 40% deposit is less risk to a lender than one who only puts in say 5%.
Suitable lenders move to round three.
Side Note: The deposit and closing costs can be borrowed out of other property; they do not need to be saved. This allows you to have in essence 105% finance
Elimination Round Three: Do you have capacity to repay the loan (also known as serviceability)?
Here you'll be asked about your existing commitments and your revenue streams. Though the reality is most borrowers understand the first two rounds and purchase property that isn’t too quirky with a decent amount of money in the transaction.
It is usually here that many a lender will fall by the wayside as it is here where lenders have different servicing models that they use. Some examples are external debts assessed as principal and interest or a two percent loading applied to stress test the borrower, or credit cards assessed as being at their limit when you can show you clear them monthly.
Any lenders still in contention move to the next round.
Elimination Round Four: Managing existing exposure levels.
Typically the ‘sweet spot’ for most lenders as far as interest rate discounts go, risk appetite, customer service, product mix and flexibility is between $1m and $1.5m.
Now that isn’t an absolute, but we often see a borrower at say $2m outstanding with the one lender, have conditions placed on their loans, such as only allowing P&I as opposed to IO, a five year IO term as opposed to ten.
So a good strategist will identify that, cross reference with the borrower’s goals and manage this so the borrower can stay as flexible as possible. This will often mean building a new relationship with a new lender back up again to that $1 – 1.5m dollar value.
The remaining lenders go to the final round.
Elimination Round Five: Who is offering a good deal?
Now (and only now) is when we start looking at interest rates. Sorry to disappoint, but the reality is the interest rate is last on the list, yes - dead last.
Let me give you an example... Lets say a lender was offering you 1% fixed, but you want to give them an old service station as security and you don’t want to contribute anything to the deal. Just to put another nail in the coffin you’re not generating an income anywhere, sorry to disappoint, but the rate won’t even come into it as the loan application won’t even get onto the fax machine (excuse the exaggerated example!).
The rate is irrelevant if your deal won’t let any lenders through the previous four elimination rounds
Earning their keep...
The last thing I want to do is down-play the importance of a good interest rate. Once you've found a lender that ticks all the boxes, then I would squeeze them for a sweet interest rate. But an experienced strategist will never do that without first knowing all the facts.
How can you learn more about the process?
As you can see, this can become quite an involved process. But certainly not one you'd want to take lightly.
As I mentioned earlier, I've been helping property investors work through this process for over 22 years. And my team at Trilogy Funding
is here to help you get started.
We're a little bit different to other mortgage brokers because we specialise in working with property investors. We're not aligned with any financial institutions, so the advice we offer benefits you – not the banks.
This means you can build your portfolio more quickly, avoid cross-collateralisation and access equity faster.
Ed Nixon, CEO of Trilogy Investment Property Funding
Call 1300 657 132 today to book your, FREE 30-minute Finance Strategy Session, or if you’re not the talking type visit www.trilogyfunding.com.au
and download a host of free investor resources
, from white papers on loan structuring, through to a hardcopy booklet on, ‘How To Structure Multiple Loans For Maximum Flexibility And Control’.
Ed Nixon is CEO of Trilogy Investment Property Funding. He has been involved in the finance industry since 1991, with 12 years experience in commercial finance. In early 2003, he changed his focus to specialist mortgage broking, specialising in the structuring of multiple loans for continued borrowing.
The above information is supplied by Trilogy Funding.
Disclaimer: while due care is taken, the viewpoints expressed by contributors or sponsors do not necessarily reflect the opinions of Your Investment Property.
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