Want to get more investment loans? These remarkably simple but powerful tips from Australia’s leading finance experts might help. Nila Sweeney, managing editor of Propertymarketinsider.com.au explains...
Frustrated with the ever changing and tightening lending policies? So are most investors these days.
If you’ve tried applying for a mortgage recently, you know how painful it is to go through the process now. And there are no signs it’s going to get better anytime soon.
And if you’re lucky enough to get approved, there’s no guarantee that you get the amount you want. You’ll now have to come up with more cash upfront and you’ll be paying a higher interest rate as well.
Indeed, getting an investment loan is becoming, even more, a distressing endeavour.
The good news is, there are still ways to get around this new normal of investing.
So how should you navigate this new perilous lending landscape?
To help you increase your chances of getting more finance, we tapped the expertise of Australia’s leading finance experts for their insights and top insider tips.
A word of caution:
While the following tactics have been proven to work, not all will be suitable to your situation. You need to look closely at your own needs and make sure you speak to a professionally qualified expert before making any decision.
Property Market Insider’s Guide to Borrowing to Invest Post-APRA Crackdown
1. Find a really good mortgage broker.
With the ever changing lending landscape, it pays to work with a really good, property investment-focused mortgage broker.
“A professional mortgage broker not only has the ability to look at other products and lenders, but they are also abreast of what is happening in the property market and can advise investors appropriately,” says John Flavell, CEO of Mortgage Choice
“A broker will also explain exactly what you need to do in order to have your application for finance approved. They will be able to sit down with you and explain the different paperwork you will need, look at your credit history and highlight whether or not it will have any bearing on your ability to obtain finance.”
2. Repay principal and interest rather than interest only from Day 1.
It’s the most obvious move you can do according to Tim Boyle, Managing Director of Finalytics Financial.
“This may not be such a bad thing for many borrowers as it results in more consistent loan repayments through the life of the loan. It’s generally cheaper than starting off on interest-only.”
Romed Syed, Director of Confidence Finance
warns that it’s important to plan for this step as the potential shock to your cash flow can be massive.
“This can be as much as a 25-30% jump in repayments when this happens,” he says. “The potential for this payment shock should be factored into your debt management strategies.”
3. Consider a Principal & Interest loan instead of Interest Only.
In the past, this is considered a dumb move as it uses up more of your cash and limits your cash flow due to the higher repayments.
With the APRA crackdown, you have few options than biting the bullet and taking a P&I investment loan.
Just beware that for some lenders, a P&I structure may improve your serviceability while for some it may do the opposite warns Steven Ryan of Interstellar Finance.
“It’s about understanding how lenders treat your existing mortgage and how they view your other debts from other lenders,” says Ryan.
“These policies are always changing so you may get a favourable policy this week from this lender and next week, it will be tighter and other lenders will be more open. You really need to be careful and speak to a broker before hand.”
4. Switch existing mortgages to Interest Only.
As we’ve suggested in our article Counterintuitive strategies to consider now
and Feeling squeezed by the recent lending changes?
, consider changing your repayment method from interest only to paying principal and interest.
Doing so may also help you get a lower interest rate and help you boost your equity more quickly as you pay more on your mortgage.
Flavell points out that your decision depends on your loan size, your loan-to-value ratio and your potential interest rate.
“Every situation is different. In the last few weeks, we have seen a number of lenders lift the rates across their suite of interest only products. As such, the rate spread between a principal and interest product and an interest only home loan could be as much as 80 basis points.”
5. Reduce your credit card limit immediately.
Marion Mays, Wealth advocate and CEO of Thalia Stanley Group recommends reducing your credit card limit to your monthly living cost spend if you want to control your spending and significantly boost your borrowing capacity.
“For example, you spend $5,000 to run your household each month, then limit your credit card to that. Then put all your expenditures on your credit card so that you’ll have the itemised record of how you’re spending. This way, you can monitor and then measure it. Most importantly, have this debt cleared monthly.”
6. Shorten your mortgage term.
Mays also suggests refinancing your loan and structuring it with a shorter life span.
“Yes, the banks want you to take 30-years mortgage because that’s how they’re going to make the most amount of money. What we say is restructure your debt and if you can afford it, shorten your home loan term to 20 years. This means you make higher repayments. But this is also a forced savings plan. Because we’re all living beyond our means.”
7. Be realistic about what you can borrow.
Boyle says it pays to allow some borrowing capacity up your sleeve and avoid maxing out your borrowing.
“Don't be too ambitious about your borrowing,” he says.“Watch out for your loan-to-value ratio (LVR) and the net servicing ratio (NSR). An ideal loan from a lender’s perspective is for the first one to be low and the second to be high.”
8. Review your other credit facilities.
Look at your existing debt facilities such as credit cards personal loans or car loans and get rid of anything that you are not using.
This will help you control your spending and massively improve your serviceability.
9. Protect your borrowing power as much as possible.
For most of us investors, using other people’s money or the bank’s money will still be the key to growing successful investment portfolios.
As Syed clearly puts it:
“Property investing is a game of finance. Arm yourself with as much knowledge about borrowing capacity as possible, and seek to manage it so you can borrow to invest further.”
Knowledge is power. Now more than ever.
Get the full report
here and learn the advanced strategies and actual borrowing systems successful investors use to get more finance despite the APRA crackdown.