How To Navigate The Minefield Of Lending Changes
About the author
Jane Slack-Smith has been named one of the Top 10 Property Experts in Australia by Money Magazine, one of the Top 4 Financial Influencers by Qantas and been awarded the Australia’s Mortgage Broker of the Year twice.
A lot has changed in the world of investor finance in the last couple of years.
Many investors have seen their borrowing capacity slashed by hundreds of thousands of dollars, slamming the brakes on portfolio growth.
LVRs are at an all-time low due to pressure from the regulator APRA to reduce the number of investment loans. This means you’ll have to save a much bigger deposit or wait much longer to build enough equity before buying your next property.
Many investors are discovering that when they go to restructure their interest-only loans, they can no longer ‘afford’ them based on new lending criteria. They get forced into an interest-PLUS-principal loan which completely derails their previous investment strategy.
Before you continue on your property journey, you need to realise that a lot has changed recently, and without the right guidance, you could find yourself being declined for an investment loan even though you know you can afford it.
While some are experiencing a tough road to investment, some savvy investors are continuing to prosper, despite these recent crackdowns. But there is still finance available–that is, if you know how to get it.
Receiving a “no” from the first bank doesn’t necessarily mean a “no” from all lenders, especially once you understand how the banks are looking into both your personal and business finances. It’s essential that you understand your financial position and your borrowing power.
Whether you are just starting out or purchasing an additional investment property, it is essential to consider your finances thoroughly and to find the right team of people to assist with your unique situation to get you on the right path to building a successful property portfolio.
After all, finance is the lifeblood of property investment.
Who is this for?
I have put this article together because the recent changes, which I will explain in a moment, are having a huge effect on both experienced, well-versed investors with multiple properties, and those who are just starting their investment journey.
Finance is an area that many investors misunderstand and underestimate. Setting up your finance correctly, from the very start, is what will set you up for future success. Fail to structure your finances correctly and you may end up watching your investment dreams go up in smoke, leaving you unable to realise your goals and potentially stuck in a worse financial position than you were to start with.
Recent APRA crackdowns and stricter lending has meant that many experienced investors are finding that they no longer qualify for investment loans or are only eligible for an amount far less than prior to the changes.
There is now that fear within the experienced investor community that these changes will hinder growth as some investors have had their portfolio growth capped due to their new borrowing capacity.
Other investors are feeling as though they have struck out of the game and are questioning whether they can even afford to service an additional property, especially if the interest rates rise or if they are required to pay both principal and interest.
These concerns are warranted. However, there are many ways to overcome the new barriers that have been presented by APRA and the lenders. Navigating these changes with the right guidance is possible as finance is still available for seasoned investors.
As a new investor, you may be concerned about setting your finances up correctly from the start.
Perhaps you know that you can afford an investment property right now, but are worried about how much you should be borrowing because you’re uncertain of the effect future lending or market changes will have on your personal situation.
I’ve seen some first-time investors locked into incorrect lending because they were acting on bad advice. The worst part is, many of them now can’t refinance, and this hinders any further portfolio growth.
Getting the right financial structure set up from the beginning is essential to building a successful property portfolio.
When you look at a situation like this, it’s easy to ask yourself “Is it all even worth it?”
Well, let me assure you: It is most definitely worth pushing through the complication and red tape and harnessing the borrowing capacity you have access to now.
In this case, it’s wise to enlist the help of a mortgage broker who can provide you with expert advice and insight into how the banks are now assessing your financial situation so that you don’t end up applying, and being declined, for the wrong loan.
So, if you already own an investment property — or more than one — and you’re looking to increase your borrowing power in the current market conditions and continue to grow your wealth by increasing your serviceability, you’re going to get a lot of value out of this article. And if you’re a first-time investor who has some savings or you own your own home with some equity, then this is definitely for you too.
I’ll help you understand how to best present yourself and your finances to the bank and also find a lender with fewer restrictions so that you can start or continue investing in your future.
Today I do a lot of media interviews and assist people how to invest in property reliably and safely. However, this certainly was not always the case. I wasn’t always an expert; in fact, I was far from it.
A little over 20 years ago, property wasn’t even on my radar. I had never even thought about the fact that people owned investment properties to build wealth. I just hadn’t been exposed to it — my parents didn’t even own their own home.
In 1995 I met my future husband Todd. He had some big property plans and was diligently paying off his first investment property. As soon as he paid it off, he was going to buy another investment property.
After some research and more education, we realised that he didn’t actually need to pay off his first home to purchase an additional investment property. He could, instead, unlock the equity in his first property and use that equity to purchase his next investment property straight away.
I feel pretty silly telling you that, given that now I’m a mortgage broker (and having won Mortgage Broker of the Year—twice!), but back then, I had no idea. How far we have come since then!
I bought my first property with my entire life savings of $45,000. But after learning how to use equity, I never used savings again to buy any of the other properties I purchased. In fact, I also used equity to fund all my renovations too!
That’s the beauty of setting up your finances correctly from the start — you only have to save for that deposit once!!!
When I first started looking into purchasing a property, I thought the biggest finance decision I faced was choosing which bank to go with, and who had the cheapest interest rate. It wasn’t long before I realised that there was much, much more to finance than I had originally thought.
I started getting asked questions like:
“Do you want to pay principal and interest?”
“Do you want a line of credit?”
“Do you want to fix your loan?”
“Do you want to split your loan?”
I had no idea what any of this meant.
At this time, I was also under the impression that I needed to save at least a 20% deposit for a property. I couldn’t quite work out how I was going to save this much… and then I found out about mortgage insurance.
Mortgage insurance meant that I could buy a property with a smaller deposit.
The more I researched, the more I realised just how much I didn’t know. So, I searched hard to find someone who I could trust that could help guide me. (I found a mortgage broker.)
My mortgage broker not only assisted me with the financial part of my investment, but he also educated me so I could make informed decisions about my investing.
He started by busting a few myths like:
- The first property needs to be paid off before a second property can be purchased (not true)
- Both principal and interest should be paid (also not true)
- You needed a 20% deposit (not true — my first property was bought with a 5% deposit)
He also explained to me that finance was the lifeblood of property investment, that leverage is oxygen, and the resulting compounding growth is what builds wealth.
My eyes were opened to the power of finance. I spent a lot more time learning and was also shocked to realise how little most people knew.
I was able to grow my property portfolio quickly because I identified the benefits of spreading my finances across multiple lenders based on their niches.
I discovered that I not only had a real passion for property but I had also uncovered a successful method for financing my investing.
It was at this time I decided to become a mortgage broker myself so that I could share my findings with more people.
From the start, I matched clients strategically to 1 of 30 different lenders that could not only help them with a loan for their next property but could support their property portfolio growth for the years to come.
The results? Having the chance to help so many people has been one of the greatest gifts of my life.
I’ve watched as everyday men and women have been able to finally achieve their most important goals—goals that previously seemed impossible and remained just out of reach.
Goals like purchasing a fantastic investment property, in a great area, that forms the foundation of an accelerated wealth-building property portfolio.
Investor Lending In Australia Today
Fast forward 17 years later, I signed off on my first property and the banks are stricter than ever on lending, which means it’s now harder than ever to buy a second or third investment property. So, it makes sense to fully leverage what properties you have without having to rely too much on the banks.
The idea is to get your properties working hard for you and generating the maximum amount of income possible.
I don’t foresee these lending conditions to loosen up anytime soon, so it’s essential that you invest sooner rather than later, so you can build your property portfolio and reap the benefits in the future. The sooner you can get your property working for you, the more room you will have to breathe – without the financial pressure.
What’s Changed In The Lending Market?
So what are the banks doing to make lending stricter and how does it affect you?
For most investors, it’s now tougher to get finance and to borrow as much as before. For instance, you might have had a borrowing capacity for $800,000 approved for an investment property just last year and now you find yourself with a borrowing capacity down to $600,000.
So why has lending changed?
In December 2015, the regulator, APRA, announced they were looking at ‘responsible lending’ practices and directed banks to make some changes to investor lending (among other things) in order to cool the rising housing market (mainly targeted at Sydney/Melbourne).
How are the banks looking in to personal finances?
As a mortgage broker, I have seen the flow on effect from APRA firsthand. Banks are now assessing banking transaction statements line-by-line.
In fact, we had a case recently where a client of ours, just out of the goodness of his heart, helped out his dad pay off a loan.
On his bank statement, it says, “Loan, $500 a month.”
Luckily, we checked his statements thoroughly. This type of item on a statement could have completely railroaded his application. As it was, we were able to explain that it was not a liability, rather a voluntary contribution to helping his dad out. For some lenders, we would have to wait 6 months for this entry to not appear on his statement before the loan was submitted. Getting a decline from a lender overturned is so much harder than actually being proactive and recognising issues before they become problems.
How can a mortgage broker help you navigate the bank lending restrictions?
To understand the logic behind a loan assessment, you either need insider knowledge or a keen interest in keeping up with every single change that occurs within the entire banking sector. The criteria are constantly changing and fluctuating, and it really is impossible for someone who is not an expert to grasp what is happening and apply it to their own situation.
A mortgage broker will not only help you navigate the changes but they will also go in to fight on your behalf to help you get approved and get the best possible rate.
Without the right finance, you can face problems later when you go to purchase another property. A mortgage broker will help you set up the right loan structure for your finance and provide advice so you can present yourself in the best possible light to the banks.
The recent lending changes have seen an increase in the use of brokers to well over 55%. That number is just going to continue to rise as more and more people feel better looked after and understood with a mortgage broker rather than a bank.
What happens when the bank says NO?
No doesn’t necessarily mean ‘No’, as we saw in the example earlier. Using a mortgage broker will help you to appeal any miscommunications with the bank, and they will prepare your application so you don’t have to have any nasty surprises in the first place.
How to get ready to apply for finance
So now, you know my story and you know how my husband started his portfolio using the equity in his first property. You also know that the lending criteria is tougher than ever and that the best way to navigate the changes is to use a mortgage broker.
It’s now time to look at the common terms that banks use and learn how to clean up your current financial position so you can secure the finance you need to realise your property goals.
Before I get into the tips of how to clean your financial house, I want to give you a couple of things to avoid when setting up your finance.
Avoid a Pre-Approval from the bank
So you’ve given the bank a bit of information about you and they’ve come back and said, “You have been pre-approved!”
Great news, right? Now you can start hunting for properties in your budget!
You may think you have been given approval but in reality you may have not been fully verified. Some banks are more thorough than others when making these types of approvals.
If a lending says you have a pre-approval, ask them if it means you have been fully verified or if it’s just that their initial assessment looks positive.
You don’t want to go and put an offer in on a house, only to be unable to secure the finance. The best way to protect yourself, in any event, is to make sure you have a finance clause written into any sale agreement, so the bank has time to get a valuation done and you can have a full approval before you sign on the dotted line.
Fast tip: Question pre-approvals and always have a finance clause written into your contract of sale agreement.
Reduce your costs
Reining in your spending is really important because how you do anything is how you do everything. If you’re reckless with spending, then there is a good chance that you are also reckless with payments. This may not be true, but the banks look at this type of behaviour and underline it in red.
There are some tools to help you understand your costs and manage them better.
There’s a number of really interesting digital products we are using at the moment to help us track spending such as www.bankstatements.com.au. Within seconds, they take all of your bank accounts and they itemise them under discretionary spend, rent, and all of these things, and neatly sorted. It quickly allows you to see how the lenders will see your spending.
It won’t be long for the banks to use this type of technology. They will be using algorithms to quickly determine where and what you are spending your money on and project this to the next 6 months of expenses. This is how they will calculate your living costs – not simply what you write down. This degree of forensic interrogation of your expenses will become the norm.
So, the takeaway from this is that you need to be aware of your spending. Be aware that banks are going to require 3 to 6 months of statements to be provided for loans, and be mindful of how you’re spending your money and what comments you make about your expenses.
There are a few small things you can do to clean up your bank statements and rectify any frivolous spending.
General home expenses
There are a few general things you can do around the home to save costs such as turn off lights and choose energy-efficient appliances to keep your home utilities at a minimum. Review any phone plans you have and make sure they still suit your needs.
Check your insurances annually to see if you’re getting the best deal. Are you paying for pregnancy cover when you are past having children? Can you combine insurance products and get a discount? Are the insured values true and accurate? It’s a good idea to check if you can put them all under one insurance lender, and get a massive discount.
It’s also good to check the sums insured you listed on your property insurance policy are accurate. I don’t think you can ever really over-insure your property, personally, but you want to make sure that you’re paying the insurance for what the real property value is.
There are a few different ways to tackle credit cards. One would be to pay off the one with the highest interest rate first. Some people say it’s better to have some quick wins and pay off the one with the lowest balance first, so you feel like you’ve won, and so you can cut the card up. Make sure you do cut it up when you do pay it off; sometimes the temptation can be too much. Other people want to pay off the one with the highest balance first. Whatever is going to really motivate you.
Just be aware that a $5,000 limit (not balance) can reduce your borrowing capacity by $20,000. In fact, you might not want to pay off your card if it eats into your deposit and reduces your ability to buy. So, it’s best to get your broker to run the numbers first.
You can move your credit card balance if you find an interest-free offer; however, don’t do it regularly if you are planning on getting a loan, because it will hit your credit file and affect your credit score.
On the 1st of July 2018, changes have been made to your credit history and all credit providers need to give a fuller picture of your credit history. Your balances, defaults, when you paid the defaults (not just that you had them) can all be seen. So rather than just showing the fact that you’ve applied for a card, it will tell when you closed it too. Just be aware that it could hit your credit rating if you do keep doing the regular transfer of balances.
So, remember, the idea is to clean up any expenses or banking blemishes that may hinder your borrowing capacity.
- Have all your documentation in order — payslips, rental income statements, etc. Get any existing bank statements ordered to cover 6 months.
- Minimise the amount of personal debt. If you have one of those “just in case” credit cards, consider cancelling it. If you have car loans or any type of personal debt, think about how you could consolidate these. The more debt you have, the less you’ll be able to borrow.
- Understand and get a copy of your credit file so you know exactly where you stand before approaching the banks. This is free and available at https://www.mycreditfile.com.au. We always check our clients’ credit file (our enquiry is not counted as a credit ‘hit’), but some mortgages brokers don’t, so if you think you have an issue, let your broker know before you lodge an application. If could result in a decline from the lender.
How to set up your finance
So, exactly how do you set up your finances to purchase a property?
Getting this right is the difference between a portfolio that grows versus being stuck at one or two properties. If finance isn’t your strong point or you don’t have a passion for it, then seeking the services of an investment specialist mortgage broking business is probably your best path to success.
Consider the following and then get in touch with a broker you feel can suit your needs.
- Learn how much you can borrow.
Look at your cash flow and ability to service a loan. You can include estimated rental income from the property in your calculations. Be aware, though, that lenders only use typically 80% of the rental income.
- Evaluate what you earn.
Generally, banks will need to see evidence of your income. Lenders will look at your cash salary only (i.e. what cash actually ends up in your hands), not your salary package which includes your superannuation investments. Some lenders will allow second jobs, casual employment, bonus and commissions, whilst other lenders don’t. A mortgage broker will know which lender suits your situation.
- Reduce credit cards and personal debt.
The more credit cards and personal debt you have, the lower your borrowing capacity will be.
A $5,000 credit card limit (not balance) lowers your borrowing capacity by $20,000!
- Check your credit file.
This is a record of your credit applications and enquiries. You can grab a copy of your credit file from https://www.mycreditfile.com.au. Lenders use information in these files to assess your borrowing capacity, and possibly in the future, even your interest rate.
Choosing a Mortgage Broker
So here’s what investors are facing in the market today:
APRA is strangling your borrowing capacity and investors are seeing their borrowing capacity slashed by hundreds of thousands of dollars. For new investors, it seems virtually impossible to get started, and for experienced investors, it’s slamming the brakes on portfolio growth.
Interest-only loans are still under scrutiny and you need to expect to pay higher interest rates for these. Many investors are discovering that when they go to renew their interest-only loans, they can no longer ‘afford’ them based on new lending criteria. They get forced into an interest-PLUS-principal loan which completely derails their investment strategy (the spike in loan servicing costs is enough to land a lot of ‘mum and dad’ investors in significant cash flow trouble).
We work with investors every day in our mortgage business, and we find that there are still lenders who will lend money based on assessment rates that are beneficial to your borrowing capacity and who won’t disadvantage you if you have existing interest-only lending. However, you need to be strategic about how your finance your portfolio to access funds.
So where does this leave you?
In need of professional help.
A professional mortgage broker who works with investors can help with things like:
- Loan structures
- Understanding the bank assessments
We take our responsibility in assisting you in your property selection as well (no, we are not buyers agents); however, we give our clients access to:
- Investment resources
- How to buy
- Where to buy
- Deal reviews, so you have a second set of eyes
For a limited time, I am working with a handful of investors as case studies to find, finance, buy and profit from their next property purchase, completely for free. No catches.
I want to give you personal access to my 18 years of “in the trenches” investing and finance experience to:
- Calculate your precise borrowing capacity in the current lending landscape so you know exactly what you can afford and you don’t get caught out by recent APRA changes.
(If you’re basing your research on a borrowing capacity “guesstimate”, this could save you hundreds of hours of wasted time…)
- Correctly structure your finance – so you can manage repayments now AND scale your portfolio in the future – without getting throttled by the banks. (Again… APRA is trying to spoil the party here. I’ll help you structure your loans so you achieve your long-term goals without legislative roadblocks.)
- I’ll personally help you find the most suitable suburbs for your budget, strategy and long-term goals during our Strategy Review – so you can narrow your search to a handful of high-performing areas. (When we apply my proven process directly to your situation, it’ll be like twisting the aperture control on a camera: thousands of mediocre suburbs will blur into the background, and a handful of “high performers” will snap into focus.)
By the time we’re finished together:
- You’ll have a clear purchase strategy to find a property that meets your criteria…
- You’ll have a 10-page personal lending plan outlining how to get your loans set up correctly from day one… but also looking at your plans for the future…
- And you’ll have the confidence and “road map” to charge towards your investment goals – without all the second-guessing and confusion that keep so many investors stuck.
The best bit?
It will cost you absolutely nothing.
For the the past 5 years, I’ve successfully sold this “Finance and Strategy” Service for a minimum of $497 (and clients raved about the value at that price).
Right now for a limited time, I’m offering it for free…
Click this link if you would you like me to personally help you with your investment strategy… one-on-one… For free.