Brokers: Andrew Crossley
Insider knowledge and experience can smooth the way when you apply for a mortgage
Times are getting tougher for property buyers. Over the past six to 12 months, every lender has made it more difficult for investors and first-home buyers alike to get finance in one way or another.
Rates on interest-only and investment loans have increased while loan-to-value ratios (LVR) have been reduced, forcing borrowers to use more equity or savings, in many cases making it too hard to purchase another property. Some lenders now refuse to accept a loan coming to them by way of a refinance from another bank if it is a stand-alone investment loan – that is, where the principal place of residence is not involved in the transaction.
The biggest negative facing first-home buyers or refinancers who just want a better rate is the cost of living expenses that lenders are now applying to their borrowing capacity calculators. It is becoming the norm that the better the suburb you live in the more you spend, and the more you earn the more you spend: living expenses are being dialled up or down based on these criteria. In addition to this, lenders are dissecting borrowers’ lifestyles and really drilling down into basic living expenses such as food, shelter and – the biggest killer – the “extras”.
These “additional living expenses” are now preventing people from borrowing
more money, perhaps because they might have a second car, private health insurance, a mobile phone, school fees, gym membership or Netflix and Foxtel. These costs are all considered voluntary expenses and will be added to many lenders’ borrowing capacity calculators.
Investors are worse off: this applies to them but also their existing debts are in many cases being converted to principal and interest payments on the borrowing capacity calculators, even though the repayments may be interest only, then a buffer rate/qualifying rate of up to 8% is being applied, even though rates can be less than 4% for investment debt.
Traditionally there have been three elements that influence the level of affordability for a borrower: the price of the property, the borrower’s income and the interest rate. But, as outlined, many other factors are now having a negative impact on borrowers.
Happily, there is a way to minimise exposure to these additional impediments: use a mortgage broker. Brokers possess insider knowledge – I suppose you could call some of it “secrets” – that the banks and their staff simply will not or cannot tell you about. They are a vital intermediator between you and the lender. They carry out all the work for you and they speak the same language as the lenders. Four compelling reasons for using a broker are:
1REASON INSIDE EXPERTISE
Brokers have regular contact with lender/bank business development managers, which in turn provides them with insider knowledge on how best to package up a loan or submit a loan application to get the best outcome. Everyone’s circumstances are different, and not many borrowers are in a perfect situation, but the more complete the application, with all the necessary supporting documents, the more likely there will be a favourable outcome.
With the broker collating all documentation, assisting the client to be ready ahead of time, and then liaising with the lender, the application is likely to be more successful. It’s not just a matter of giving the lender a bunch of statements and expecting a loan to be approved. Good brokers provide clear and explanatory submission notes to summarise the strengths of the borrowers and paint a picture to the lender. They monitor the deal’s progress, getting involved in expediting the loan or endeavouring to seek an exception to policy, where necessary, in order to help the deal move through the system.
Examples of this include assisting a borrower with the wording in the letter of employment to support the income, employment type and tenure of employment. This is very important when explaining anything that is earned over a base wage. The more thorough the notes provided in support of the application, and purpose of the funds, the better, particularly if there is a cash-out or an equity release component of the loan.
Anyone over 55 will find it more difficult to obtain a loan. Lenders won’t admit to this, of course, but the borrower’s age will certainly be closely scrutinised. Their experience in obtaining a loan can be made much more pleasant and the outcome more successful with the help of a broker. The broker would understand the exit strategy the lender will require, and can then assist the client in documenting the exit strategy. There are some exit strategies that are not acceptable, and you will have only one bite of the cherry with that one lender.
Because brokers often have direct access to the credit assessor who will determine the suitability of the borrower and the property being offered as security, they can help massage the deal through.
2 REASON SMART CALCULATIONS
Borrowing capacity calculators differ among lenders. You may be able to borrow tens of thousands from one but I have seen instances where it is hundreds of thousands more with another. Brokers do all the work in comparing calculators and policies – it is not just about the rate – to try to get their client the loan that Brokers possess insider knowledge the banks … simply will not tell you about
best achieves the desired outcome. No one lender will do this for you: as they only sell their products, they are limited to their own calculator.
The broker can choose a lender that assesses existing debt using actual repayments, not converting them to principal and interest, at a lower qualifying rate/buffer rate than what you have access to, as some of the lenders that offer better borrowing capacity calculators are not widely advertised to the general public. These lenders offer better rates than the big four banks. An example is Homeloans, a mortgage manager that provides several lending solutions. One of its products has only a 20% buffer for repayments on a client’s other mortgage debts.
3REASON CREDIT SCORE PROTECTION
Applicants sometimes create problems for themselves, such as by making inquiries with different lenders. In doing so they can degrade the quality of their credit history. Each time a person shops around, a hit may appear on their credit file, making it less palatable for a lender to want to deal with that borrower. More than two hits and you are effectively a poisoned chalice to most lenders. A good broker shops around for you, without affecting your credit file. They do all the legwork, submitting your application only after ascertaining that it meets that lender’s policy.
4REASON HANDS-ON EXPERIENCE
I have found that many bank staff lack the personal experience needed to truly put themselves in the client’s shoes. They may have forgotten what it was like to apply for their first home loan, or they may be very young and have no investment properties themselves, or they may not understand more complex trust structures.
Finding a broker who specialises in particular products or borrowers – such as first-home buyers, construction or commercial finance, property investors or non-conforming loans – increases the likelihood of being offered a tailored solution, not a product off the rack. This is important for anyone who ever wishes to purchase more than one property in their life. They need a strategy. A good property adviser will work with a good mortgage broker to map out a path for the borrower to be better able to keep borrowing money. There is an order in which you choose a lender based on your property strategy.
Getting your finance structure correct for investing is critical. It can enable you to more easily purchase your first property and put you on the path to achieving your investment goals. On the other hand, if it’s not set up correctly it almost certainly will place premature limitations on what you will be able to do, resulting in frustration and missed opportunities. Your finance structure and strategy must be sustainable based on your circumstances and have the flexibility to enable you to manage it on your terms. Understanding structural differences in potential paths forward will help in the future, not just the next 12 months or three years.