Stuart Sutherland’s top tips
Dealing with tiered interest rates
In the last quarter of 2015 lenders began applying higher interest rates to investors compared to owner-occupied borrowers. What you may not know is some lenders are offering the lower owner-occupied rates for investors if the loan is contracted with principal & interest (P&I) repayments rather than interest only (IO). This can be an interest saving of between 0.20% and 0.60% in some cases.
TIP 1: Pay principal & interest
If you are a borrower who has the capacity to repay principal on your investment loan, then take a closer look at the lenders who offer these investment P&I loans. The beneﬁt being interest savings, debt reducing and equity growth instead of solely relying on the market value of the property to increase.
TIP 2: Tell your lender if you’ve moved into your investment property
If you purchased an investment property some years back and you have now moved into the property, make sure you tell your lender so your loan interest rate can be based on owner-occupied rates.
Loan to value ratio (LVR)
Investors looking for a standalone investment loan that represents 95% of the purchase price and wanting the lenders mortgage insurance (LMI) capitalised on top of the loan will be hard pressed to ﬁnd it in today’s lending market. There are still a small number of lenders including one of the big four banks who will lend up to 95% including the LMI. This restriction only applies to standalone property scenarios.
TIP 3: Use your equity or look elsewhere
If you have an existing property with available equity then leaning on that equity will still allow you to borrow up to over 95% of the overall purchase price and cost depending on the size of your equity available. If you do not have existing equity then there are still lenders happy to lend up to 90%.
If you have committed to an apartment off the plan in 2014 and 2015 you will most likely be beginning to make preparations to secure the loan approval and settlement in 2016.
You need to firstly read the above two points and then have a strategy ready in case the valuation of the apartment comes in at a completed value which is lower than the contract of sale (COS) price. COS are not automatically the starting value used by the lender in the assessment process.
TIP 4: Make sure you have enough funds to settle
During the period of time between committing to the purchase of the plan and the application preparation, the borrower needs to be saving as much as they can to go towards the purchase, either into a savings account or existing loan to build up the equity. If the completed market value comes in lower than the contract price then the applicant needs to borrow more or contribute more, all dependent on the end LVR.
It is important to know that no two banks will lend you the same amount, says Sutherland. Three of the key assessment triggers they use, for example, are very different.
• Firstly, let’s take the assessment rate which is the rate that the lender will use in its calculation method to determine if the loan amount you are requesting is suitable for the income to service. The difference just between the big banks alone is a staggering 1.32%. What this can mean is a loan approval difference of around $70,000 for a customer earning $100,000.
• Secondly, some of the lenders will use the actual repayments on existing loans held with other banks that you may already have in their assessment calculations while another lender will calculate loan repayments with other lenders that you may have at the higher assessment principal & interest repayment calculation method (even the interest-only loans). This also results in significant variances in the loan approval amounts.
• Lastly, policy tightening has resulted in lenders insisting on your budget instead of calculating the poverty index amount for the number of applicants and dependents to work out if there is loan serviceability constraint, adds Sutherland.
TIP 5: Be honest
My tip here is to be honest with yourself and your broker so that the right size loan and lender can be matched up with your life stage and wealth creation strategy.
In the last quarter of 2015 we noticed lenders giving more attention to and creating their own lists of known 'high risk of defaulting customer' areas. What this mean is that if you are looking to buy in a postcode that a lender considers is a high risk of loan default area, then you are likely to be conditioned with a lower than expected LVR and therefore will have to come up with a higher deposit or equity contribution.
Unfortunately these statistical reports appear to be based on owner-occupied borrowers defaulting in these postcodes and the happy investors living elsewhere who want to buy an investment in these areas have been caught up in the policy.
TIP 6: Get your broker to pinpoint these areas
Your broker can identify the postcodes and the lenders (they don’t all have the same list) so then you can match up with the lender that is comfortable with
Marissa Schulze’s top tips
TIP 7: Get a great mortgage broker
There is more complexity and confusion in the finance industry than ever before and it can be a minefield if you try and navigate your way through it on your own. It is essential that you find a great mortgage broker who you can trust who is going to help you to determine the best way forward for you and be able to present your finance application in the best way to the lender of your choice.
TIP 8: Review your loans
So much has changed in the past six months, and if you have not reviewed your loans recently, now is the time to do it. Your interest rates may be a lot higher than you expect and you may be alarmed to know that your bank has increased your interest rate without necessarily informing you. Review your loans and be prepared to move lenders if it is going to enable you to save money and achieve your financial goals sooner.
TIP 9: Reduce any unnecessary credit card limits
Lending requirements and servicing is getting tighter so it is really important that you do everything you can to increase your borrowing capacity. Reducing your credit card limits makes a significant difference to your overall borrowing capacity.
TIP 10: Get rid of personal loans and car loans
Personal loans and car loans significantly impact on your borrowing capacity. So, if you can work towards getting rid of them, your borrowing capacity will increase substantially once they are eliminated.
TIP 11: Keep your credit report clean
Credit scoring is more important than ever before and could mean the difference between whether you can or cannot source the ﬁnance to achieve your dreams and goals. Keep your credit score extra clean by doing the following:
• Pay all your utility and phone bills on time
• Pay all of your mortgage repayments on time every time
• Pay your credit card bills on time
• Avoid defaults and late payments
TIP 12: Don't apply for finance you don’t need
Not many people realise this but every time you apply for a loan, get a pre-approval, buy something on an interest-free term, do a balance transfer on your credit card or make an enquiry to a lending institution, it is likely they are registering an enquiry on your credit report.
Multiple enquiries significantly deteriorate your credit score to the extent that it may mean that you can’t get the finance you want. Most people have more credit enquiries on their credit report than they would expect and even if you have only had as few as six credit enquiries on your credit report this can be enough to substantially impact your credit score.
TIP 13: Do not submit a loan application that you are not 99% sure will be approved
Declined loan applications are also not good for your credit score. This is why it is so important to work with a reputable mortgage broker rather than a bank.
A good mortgage broker will be able to assess the loan application completely before an application is made to the bank. He or she will be able to determine your ability to service the loan according to the lender’s policy and be able to identify and overcome any potential issues before the application is submitted. This way you can be sure that the application will get approved.
TIP 14: Know your living expenses
Banks are now wanting clients to confirm their living expenses. So, make sure that before you apply for finance you know what your living expenses are and have them documented. This may also be a good opportunity for you to look at your expenses and see where you could potentially save some money that could be directed to something more useful (like building your investment property portfolio).
TIP 15: Stay open minded and explore different lender options
Whilst APRA’s new rules have affected the majority of lenders, there are still a number of lenders which are not authorised deposit taking institutions, so are not governed by APRA. They are still long standing, reputable lenders but they just don’t have the branches and transactional products that you would expect from a mainstream bank. Your borrowing capacity may be hundreds of thousands of dollars better with one of these options. So, find a great mortgage broker and be open to the options they present.
TIP 16: Look for cheap ways to grow your own equity
With banks reducing LVRs on investment properties, you need to get creative and look at ways you can create your own equity growth across your current property portfolio. Look for cheap ways that you can add significant value, which will give you the equity growth you need to get your deposit on your next property.
TIP 17: Know where your deposit will come from
Whilst most banks will only lend up to a maximum of 80% or 90% of the value of an investment property, there are still a few banks that will lend up to 95%. If you do not have the cash or equity to be able to fund the deposit, explore other options, eg. can your parents provide their house/investment property as security for the deposit?
TIP 18: Consider living in the property before it is converted to an investment property
The new lending rules favour houses that are owner-occupied rather than investment. If you are finding it difficult to get the funding to buy that next investment property and/or you need to borrow that little bit extra, perhaps consider living in it for a short time.
TIP 19: Get your properties valued regularly
Build a relationship with a great mortgage broker who has the ability to order free upfront valuations for you every 6-12 months.
TIP 20: Focus on rental return
Historically, most banks would allow for negative gearing when calculating your ability to be able to afford to buy an investment property. Unfortunately this has been removed from many lenders’ servicing calculators, which means that banks are purely looking at the pre-tax cash ﬂow of an investment property. This makes it very hard for investors to purchase highly negatively geared properties. Look for properties with a stronger rental return, which will not impact on your borrowing capacity as much. This will enable you to grow your investment property portfolio at a faster rate.
TIP 21: Get a pre-approval
Don’t bid at auction without a pre-approval. A pre-approval is also highly recommended as it will give you more negotiating power when it comes to negotiating with the agent.
TIP 22: Get an upfront valuation if you are looking to buy a house and land package
It appears that valuers are expanding the scope of the type of properties that are considered ‘split contracts’. If a valuer deems that property you are purchasing to be a split contract then the bank will not allow you to have a construction loan but will instead want you to fund it on an ‘off the plan’ basis. Make sure you know what the valuation says before applying for the loan.
TIP 23: Avoid off the plan purchases
Many people do not realise that when they sign a purchase contract for an off the plan purchase they are signing an unconditional contract. With settlement often greater than 12 months from the date of signing this presents a huge risk to the purchaser. If anything changes between the date of signing and settlement, the purchaser may no longer be able to get finance and may lose their entire deposit and also be up for hefty legal fees and have to compensate the developer if they cannot re-sell the property to another purchase at the same price. Things that pose a risk to your ability to get finance are as follows:
• Your employment situation changes eg. changing jobs,
becoming self employed, being made redundant
• You take on additional debt (eg. increase your credit card
limits, buy a car, enter into a novated lease etc)
• You have increases in personal expenses or addition of dependants
• Your relationship status changes
• The cash or equity planned to complete the purchase needs to be used somewhere else
• The banks tighten up on lending policy even further
• The value of the property at completion comes in much lower than the purchase price, resulting in you not having a big enough deposit to proceed with the purchase
TIP 24: Get prepared to buy
With tighter lending and the potential for increasing interest rates, the next 24 months will present some great buying opportunities for investors who are cashed up, have their finances in order and have a great proactive mortgage broker.
TIP 25: Get consistent work hours and consistent income
If you are self employed ensure that you are showing enough revenue and profit to prove to the bank that you can afford the additional finance you need to support your goals. If you are casual or part time try and negotiate consistent work hours with your employer. If you are planning to take unpaid leave then make sure you get the finance approved before you take your unpaid leave as unpaid leave can drastically reduce your annualised year to date income when the bank determines how much of your income they will accept for the purpose of the application.