We’ve all heard that APRA’s restrictions have caused the banks to tighten the screws and make it even harder for many investors to get their new loan or refinance their existing loan.
As the banks tighten their purse strings, investors need to think outside the square when it comes to gearing into further properties.
In a recent Real Estate Talk show Michael Yardney from Metropole Property Strategists goes through eight strategies to make sure an invisible serviceability ceiling doesn’t stop you from growing your property portfolio.
HERE’S A TRANSCRIPT OF THE INTERVIEW:
(Alternatively you can listen to the short podcast at the top)
Kevin: What are the strategies you would suggest someone put in place to make themselves more attractive to the banks?
Michael: The lending landscape has changed over the past few years partly related to APRA’s restrictions.
Today banks measure your serviceability not on the prevailing interest rates of, say, 4.5% but they test your serviceability and ability to repay the debt at 7.5% or 8% and also the bigger payments of principal and interest?
Yet there are some tricks you can use to make yourself look better to the banks.
Kevin: What are they?
Michael: One of the first things you should look at is your credit cards, because the banks take into account your credit limits.
Even if you’ve never borrowed to the limit, they figure that you could go out and buy something expensive tomorrow.
So if you have multiple credit cards, maybe you should get rid of all but one, and if you have a credit limit of say $10,000 that you’ve never used, cut it back to a much lower amount and then all of a sudden, the banks will see your serviceability as higher.
Kevin: What else can investor do?
Michael: Another thing is consolidate your unsecured debts, because what the banks ask you to do a balance sheet of all your income, your assets, your outgoings, your liabilities, including other debts.
Sometimes people have high-interest credit card facilities or other loans and it’s often good to try to consolidate them into a lower interest rate facility and make yourself more attractive to the banks.
Kevin: And we think of ourselves as individuals but the bank really looks at us as a business.
We therefore have to act and put forward a business front when it comes to things like our paperwork.
Michael: If you can’t provide the last few pay slips, if you don’t have all the details of any bonuses that you’ve received, it makes it really hard for the bank to get an accurate serviceability picture.
Therefore get all your paperwork in order.
If you have a proficient finance broker, they’re going to make sure that you have that before they even submit your loan to the bank.
It makes you look more effective and efficient.
Kevin: What about shopping around?
Are you raising your head then if you’re looking around at the different loan products and you make applications?
Is that a bad thing?
Michael: It’s a bad thing if you’re making multiple loan applications, but you should definitely be shopping around and looking for the right loan product.
That doesn’t mean the cheapest interest rate, because I’d rather have a bank that will lend me another $300,000 or $400,000 and spend another quarter of a percent interest to get that than to get the lowest interest rate and not be able to get another investment property.
That’s where a proficient mortgage broker will help you identify the loan products most suited to your needs with features that potentially work to increase your financial capacity.
Different banks will look at your serviceability differently.
But no, don’t go to different banks and apply, because if you do, that shows up on your credit score and then they’ll wonder, “Hey, why are they doing that? Why haven’t the other lent him money”
Kevin: I remember when we started borrowing money to invest in property, albeit it was a principle place of residence, but the banks in those days didn’t take into account Carolyn’s wage or Carolyn’s income.
That’s all changed, hasn’t it?
Michael: Very much so.
If you’re going to be buying a property with your life partner, your spouse, a family member, if you can show that there are two people who are going to carry the burden of the serviceability, it suddenly increases your ability to get loans.
Kevin: What about cross-collateralization?
Michael: We’ve spoken about that often in the past, and what we’ve said is in general, we’d like to avoid it.
But sometimes it is unavoidable, and by offering additional security to the banks, it can occasionally allow you to borrow a higher LVR.
So if it’s the last resort and that’s what you need to get into the market and take advantage of the opportunities, then yes, sometimes you just have to do that.
Kevin: Do the banks like me taking loans over a longer period?
Michael: We usually think about 20- or 25-year loans, but there is a small group of lenders who let you borrow for up to 30 years, and I think there are one or two that offer even 40 years for the right candidate and that extra 10 years saves hundreds off your monthly repayments.
Over the long term, of course, you’re paying a lot more because you’re paying interest for longer.
But I wouldn’t be suggesting you keep that loan for 30 years.
Maybe in three or four years’ time, you’d revisit it, you’d refinance it, you’d see how things are going on.
But it’s definitely a way of making it more serviceable by actually having longer loan terms.
And, there’s also the concept of locking in on interest rates today.
The banks are looking at your serviceability based not on the current 4.5% or 5% interest rates but much higher rates s I explained.
If you lock in a portion of your interest rates – and I’d be suggesting you get good advice to see if that’s appropriate for you – then the banks can’t say, “Hey, you have to be able to service your loans at 7% or 8%.”
It makes it more serviceable because a portion of your loan is already locked in as a rate that’s fixed for the next three to five years.
Kevin: This is all about making yourself look as attractive as you possibly can to the bank, isn’t it?
Therefore showing that you’re a good saver, is that important?
Michael: There are two elements to that.
First of all, showing a good savings record makes you attractive.
But the other is giving yourself more deposit, more equity to get going works.
You should be spending less than you earn, saving that, and maybe if you’re starting off, putting it in an offset account against your home loan if you have one or into an interest bearing account if you don’t have any other loans that you can take advantage of – and get a good track record, a good savings record, but also it’s a great discipline moving forward as a property investor,
Kevin: Thanks, Michael.
Michael: My pleasure, Kevin.
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