How to secure extra finance

You may not always be the bank’s idea of a perfect borrower, but you still want to invest in property.

You know you are a model financial citizen. When it comes to money, you have never let anyone down. You have paid off your debts, budgeted carefully and refused to let frivolous spending stand in the way of your savings plan. You have never fallen behind in rent, missed a payment on a bill or had to borrow money off friends or family. You know all this. The problem is…the banks don’t.

When you want to borrow money from a bank to buy an investment property, or indeed for any other reason, it is important that you understand that the bank sees you as a business proposition. Lenders have policies that cover who they give money to and in what situations. Their rules have been honed over years of business, to reflect the likeliest outcomes of lending certain sums of money to particular types of individuals. They are not in the habit of bending these rules because you might have a compelling story, even though you know you will be able to make repayments. If you don’t meet their criteria, you are unlikely to be given a loan.

Help!

In this way, banks are like courts. They interpret their policies to the letter, like a judge presiding over a legal case. If you want a judge to make an exception, you need great representation from a professional. Arguing your own case will likely get you nowhere. The same applies when trying to convince a bank to lend you money. Mortgage professionals are in regular contact with bank staff who are behind the front counter and who have access to those making the lending decisions.

This foot in the door enables them to gauge how likely your loan is to be approved, without you having to officially apply and risk a rejection on your credit record. It also allows them to argue your case if they think you are close enough to meeting the criteria that a bit of gentle reasoning will persuade the bank to fork over some capital.

Your unique situation

Every single would-be borrower is assessed based on their own unique circumstances when applying for a loan. You can’t rely on any black and white rules, because the slightest issue with your record or current circumstances can vastly affect the amount you might be able to borrow, or even whether you can borrow at all. Still, there are a few scenarios that pop up fairly regularly and, if one of the following sounds like you, you may benefit from some expert advice.

Migrants

Australia is a popular country and thousands of people are migrating here each year. If you are settling in a new country, you probably want to get set up with your own home as soon as you are able.

Provided you have been here long enough to achieve permanent residency status, you are no more restricted than someone who was born and bred down under.

While permanent residents are as eligible for a loan as Australian citizens, migrants that are not yet permanent residents will usually rent somewhere until they are eligible, which gives them a history of making rental payments to go along with their employment record. They might be granted a loan approval in some cases, say, for example, they are on a special visa and have gained approval from the Foreign Investment Review Board (FIRB).

Top tips:

• Paperwork required is usually the same as for a standard application, but any documents not in English will need to be translated by a registered interpreter, at your own expense.
• Allow extra time for the application to be processed, as it may involve more checking on the behalf of the lender. It is worth negotiating a long settlement period on the property if possible.

Self-employed

If you have had enough of working for the man and want to be your own boss, you had best put any property investment plans on hold, at least for two years, so you can show the banks that your income is steady enough to service a loan.

Exceptions are extremely rare in this scenario, but leniency might occur if the self-employed person changes employment status, but not employer.

In addition to the two years of income history, you must be able to show lenders you have an ABN and are registered for GST purposes. When assessing your application, lenders will usually take your income for the two years and make an average to calculate a yearly total. They understand that income can be slightly erratic from year to year, but if it varies by any more than 20%, they want a good explanation. Then they may even use the lesser figure instead of an average.

Top tips:

• Make sure you can clearly show two years’worth of work history, or the banks won’t want to know you.
• If you do contract work for a former employer, your old job may be considered in the assessment. Make sure to include this in your appplication.
• Line of credit loand provide great flexibility if your income is typically erratic.

Low income earners

If you have a low salary, you might find it extremely difficult to borrow enough money for a property. Even if you are in an entry level role, with a salary that you know will increase significantly in the future, the banks aren’t impressed. They rely on your record, not speculation, so as far as they are concerned, your past is your future until proven otherwise.

Top tips:

• If you can’t wait to invest, consider entering into a joint venture with another borrower.
• It is better to put property investing on hold for a year or two while you build your finances than risk a rejection on your credit record.

Older borrowers

If you are over 50 and want to apply for a home loan, you can find that your options are seriously limited. This is because there is a good chance that you will stop working while still paying off the loan, so the banks want to know how you are planning to keep the repayments coming. Not only this, but responsible lending guidelines were introduced as part of the National Credit Act in January, 2011, forcing banks to be more stringent with older borrowers.

Most lenders will require an exit strategy in this situation, which could include plans like downsizing to a smaller home when you retire, selling other properties or shares and making repayments from superannuation, either lump sum or ongoing.

If you are able to pay off your loan before your retirement, or service it with ongoing rent from high yielding investment properties, you are more likely to be granted a loan.

Top tips:

• Make sure you have an exit strategy in place, before making the application, so that the lender can satisfy legal obligations.
• Consider tapping into your super to make repayments if you will hit retirement age during the loan term.
• Rent received from other high-yielding investment properties may help your chances of a loan approval.

To discuss this article or anything to do with your finances, please call our office today and we will be happy to assist you.

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