A Recipe For Getting The Right Loan

It’s all over!   Or could be...depending…..

But, don’t get too excited because the pain caused by high interest rates will continue for at least 18 months…maybe more…depending…..

That was the “hopeful” message from Westpac boss, Gail Kelly, who last week announced a healthy six month result for her bank which of course we are all very happy about.

(I know I sleep better knowing that the directors and senior executives of the major banks are earning their bonuses).

Ms Kelly’s view is that the worst of the sub-prime debacle is over and the resulting credit squeeze is likely to ease over the next 18 months.

Her sentiments are echoed by others including the venerable Bank of England.

But what is going to happen in the next 18 months particularly for those of us feeling the pain of recent interest rate hikes?

Here’s an example: We were approached by an investor whose interest rate had jumped from 8.4% to nearly 11% in the past 12 months. He was struggling to hold on to his property.

After a search of our panel of lenders, we found him a better rate. But he had to cop some hefty exit fees to get out of his old loan. It was either that or sell. He figured that because the property’s long term growth prospects were so good it was better to take the hit.

There are two points to be made about this. First, there are better rates available if you know where to find them. Secondly, he took the original loan because the second tier lender was offering a terrific rate for a 90% Low Doc facility. But the best rate isn’t always the best loan.

Rate chasing can be short sighted, particularly if you end up with the wrong lender.

In this case, when push came to shove, the lender who is not subjected to the same close scrutiny as one of the majors was able to rack up its interest rate to a level which forced our investor against a wall causing him to look elsewhere. This was exactly the idea!

These days lenders are shying away from so called “risky” loans. A form of loan rationing has emerged which, by all reports, hasn’t been seen for twenty years.

Lending criteria has tightened across the board. No Doc and Low Doc borrowers face increased scrutiny and most lenders have reduced the loan to value ratios permitted for these types of loans.

None of this is necessarily bad except for the hypocrisy. Having flooded the market with “risky” products and created a generation of debt junkies, they’re now cutting off the supply.

The point of all this is that the home lending landscape has changed and won’t ever return to the freewheeling days of recent years.

To obtain a loan and keep a lid on the interest rate, borrowers need to be mindful of three important ingredients all lenders will be looking for.

Let’s call it my recipe for success.

A Pinch of Collateral 

Lenders like you to take some risk. Most will be very happy if you contribute 20% or more to the cost of a purchase, either with a cash injection from savings or by using equity from another property.

Canny investors obtain deposits from lines of credit secured against property in which they already have equity. This enables them to borrow 100% of the purchase price without paying lenders’ mortgage insurance (LMI). It can also cover costs and renovations

Show a lender you are prepared to throw some collateral into the deal and you’re a long way toward getting that loan.

A Large Dollop of Cash 

Lenders require proof that you can afford to repay the loan. Each lender has a “serviceability calculator” to test your capacity to make timely repayments.

Every lender’s calculator will produce a different result. Some are tougher than others. But all your income and expenses are factored into the calculation. If you fail you will not be provided with funds.

You will then have to supply documents to support your income claims.

Many borrowers see No Doc and Low Doc loans as a way around this. But most lenders still want a signed income declaration and a detailed outline of assets and liabilities. While these products are available for PAYG borrowers, most require you to be self employed and have an ABN for between 12 and 24 months. . It is an offence to sign a misleading income statement

Expect to pay a premium rate and, in the case of No Doc loans, have a deposit of at least 30% of the purchase price.

A Tablespoon of Character 

Lenders want to deal with reputable borrowers and run credit checks as soon as an application is lodged. In many instances it is automatic. One computer talks to another.

Some lenders will overlook small or old infractions, but the interest rates are higher.

Black marks on your credit record can seriously inhibit your investing career, and it is surprising how many people either don’t know or forget about them.

Wise investors pay a small annual subscription to a credit company to be told anytime there is an enquiry or change to their record. This can also help prevent identity theft.

Mixing these ingredients into a recipe that appeals to the right lender for your circumstances can be difficult and time consuming. Many investors rely on the consultants at Finding Finance for help.

We match investors and their needs with lenders and their products. We have a choice of 30 lenders on our panel and can provide a range of options. The best part is that our work is provided to borrowers for free. We are paid by the lender you choose to deal with. We are always happy to meet the needs of women investors, so call us on 1300 729 075 or visit www.findingfinance.com.au  to lodge a Loan Enquiry and have someone contact you.

Paul Ransley
CEO Finding Finance

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