Did you know that billions of dollars in dwelling finance commitments were approved in September in Australia?
That’s right, according to the Australian Bureau of Statistics, tens of thousands of dwellings were financed in one single month for either owner occupiers of investors.
Of course, that tells us that banks are still in the business of lending money!
There is no denying that are a few more hoops to jump through but working with experts and knowing how to present your finances in the best way means you’ll be ahead of the pack at the start.
And I really am a little tired of all the doom and gloom – be careful what you wish for, especially our sensationalist journalists, haven’t we had enough of this? Confidence is being eroded and this is quick to lose and takes a long time to rebuild. We’ve written many times about unintended consequences, maybe this is now coming to bear.
As the ACCC has just reported, the banks have been gouging based on their interest only rate increases over the last 12 months.
“Pricing for mortgages is opaque and the big four banks have a lot of discretion. The banks profit from this and it is against their interests to make pricing transparent,” ACCC Chair Rod Sims said.
“Borrowers may not be aware they can negotiate with their lender on price, both before and, particularly, after they have established their mortgage.”
As at 30 June 2018, an existing borrower with an average-sized mortgage could initially save up to $850 a year in interest if they negotiated to pay the same interest rate as the average new borrower at the five banks under review. For many borrowers the gain will be much larger.
So, with that in mind, let’s look at seven steps to home loan success to consider.
1. Be able to justify your living expenses
Most people have no clue whatsoever about how much they spend every month.
While that is never a good idea, it’s doubly so now because lenders are assessing three months-worth of your bank statements in your loan application.
So, it’s a wise idea to stick to a budget, but also to be aware of all your living costs as well as be able to justify them, especially when it comes to one-off expenses that might happen in that three-month window like a holiday or at Christmas time.
And those of you who are lazy and rely on Uber eats and the other conveniences of tag & go, you will be scrutinised over this spending!
2. Spend less than you earn
I know it sounds dumb, but in today’s society of “immediacy” and needing everything right now, it’s simply not enough to spend less than you earn for a short period of time.
The best money managers follow that philosophy always, so they can invest in income-producing assets like real estate.
Not only do they keep to a budget, they have developed the will power to resist overspending on their credit cards or the new version of layby, Afterpay, which is teaching bad money habits to a whole new generation.
3. Make sure you pay everything on time
From 1 July 2019, Comprehensive Credit Reporting and Open Banking will mean dirty money secrets will be out in the open.
So, that undisclosed credit card you don’t use, or the missed payments or overdrawn account will all hurt your credit rating as well as your ability to access finance.
Conversely, though, those with good credit histories should see the benefits of their good habits come to fruition.
Regardless of the new system, managing and monitoring your personal debt is always imperative to give yourself the best shot of loan application success.
4. Put some away for a rainy day
The savviest people when it comes to money always have a financial buffer for a rainy day.
They have saved those funds, which are set aside for emergencies such job loss or illness, plus they have discipline not to touch it.
We wrote recently about the decline in savings and this is a concern to many, and it should be!
That buffer can also be called upon in times of financial need, too, like for unexpected repairs on a rental property or if an interest-only property loan expires and you have to start paying principal and interest for a period of time.
Not only that, they make sure to replenish any funds that they use over time because it’s not rainy-day money if the balance is zero!
5. Don’t cross collateralise your loans
I know I’ve been banging on about this for years but it’s still happening.
Some borrowers struggling to secure finance at present might be considering cross collateralisation as a way to improve their chances.
This involves using one property as collateral for the other, all tied together with one loan policy that impacts each property.
Crossing your loans is usually unwise because policy changes increase the risk of you losing control of your portfolio if the lender decides to increase interest rates dramatically, which will impact repayments for both properties.
As you can imagine, that could have significant implications for your cash flow.
Ditto, if you decide to sell one of the properties but the value of the remaining one has reduced, so the bank decides to shave off some of the proceeds to pay that down before you see a red cent.
Crossing your loans might seem like a work-around but in reality it is handing over control of your portfolio to the bank.
6. Be willing to consider all your options
As the Royal Commission has proven, banks don’t always have your best interests at heart (We have known this for quite some time but no one’s said it out aloud).
Guess what, as I alluded to earlier, banks profit on people’s laziness and it’s seems Australians are born with a complacency gene that is just costing them money!
The upside is that there has been a drastic increase in the use of non-bank and second tier lenders by borrowers.
Not only that, because they are not beholden to the same credit rules as the major banks, smaller lenders have improved their product offerings to become more attractive to borrowers.
Another option is to consider paying principal and interest on an investment loan if that will make the difference between securing an investment grade property and missing out.
7. Do a health check on your loans
I really dislike the term “set and forget” – unless we’re talking about jelly!
Neither property loans nor property investments should be classified as things that don’t need regular reviews.
When it comes to loans, it’s important that you undertake reviews to assess whether they are still the right fit for you, including interest rates, or whether refinancing to other lenders might be best for your bottom line.
At the end of the day, the lending environment is what it is and there is not much us mere mortals can do about it – apart from being ready to present the very best version of our financial situation as possible.
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