Advitorial Guest Blog by Owen Waters of FNQ Finance Guy
Awesome, you’re ready to invest in property. It’s the right time for you and you’re going to need finance. Buying property and taking out a loan is a big decision to make so finding out you don’t qualify for a loan can be at best disheartening. There are a lot of things you can’t influence in a hurry when considering finance however knowing what the banks are looking for can help. So what are they:
Your credit history
Banks use a credit rating, which includes a credit score, when considering your loan application. The credit score is calculated based on information from your credit history, the higher the score the better, too low and you could be declined. There are many things that can affect your score but something as simple as enquiring at lots of credit providers for the best deal can negatively impact the score. Which is a good reason to use a broker as they will do the hard work for you and work out if you qualify first. Other ways to improve your score include avoiding late payments on your bills but it pays to check your score if you are considering finance. By doing so you might pick up when something is wrong (even if it’s a mistake) and then work on repairing it.
Banks need to see that you have a secure income to service any potential loan. They may consider your employment is not secure if you are on probation or have been there for a short period of time. A mitigate for this is if you have changed employers but remained in the same industry. If you are self-employed, the length of time you have been in business or big fluctuations in profitability can affect what lenders view as your ability to service a loan.
Banks will look at your financial history for evidence of genuine savings. They look for your income exceeding your expenditure and your capacity to save. Demonstrating this capacity will positively impact your ability to secure finance. If balancing the books is a challenge, create a budget and work to live within it before you apply for a loan.
Generally, the more you can save towards your deposit, the more favourably your application is considered. Saving more also means that you can borrow less or potentially be able to buy a better property. If you have less than a 20% deposit then you, with a couple of exceptions, will need to pay Lenders Mortgage Insurance and often higher interest rates. A 5% deposit is usually the minimum deposit required although most lenders will require 10% for Investment Property Loans. If you are struggling with the deposit then there are lender solutions out there such as shared equity loans where a family member provides equity in their property to secure the loan.
Other loans and Credit Cards
All loans, credit and store cards will impact on the banks assessment of your capacity to service debt and the amount they will lend you. It’s a good idea to consider the timing of any loans for cars, bikes or boats or even “interest free” store purchases. Before you apply getting rid of any credit and store cards, you can do without, will help. If necessary you can reduce your credit card limit to the minimum amount you require.
If you are planning to start or grow your family be aware that banks consider the number of dependents (children) you have as part of your capacity to service the loan. To maximise your borrowing capacity, get your loan application finalised before getting busy might be a good idea.
Consider any new commitments carefully if you are thinking of borrowing to buy an investment property. Things like your rent, that new phone contract or Austar will affect your capacity to borrow and could make the difference between securing the loan you want or missing out.
Managing your discretionary expenditure is an important factor in securing your loan. Understating your expenses is not an option as most banks use an index such as HEM (Household Expenditure Measure), which is based on ABS average household expenditure, to calculate typical minimum expenditure. They use these figures in their mortgage calculators to see how much you can borrow. If your stated expenditure is significantly lower than the average, it will be generally be adjusted by the bank.
Finally a successful borrowing strategy should include talking to a skilled professional, someone who has access to a wide variety of lenders and lending options.
Regardless of who you use for your finance make sure you provide all the information needed and make sure you have factored in the full costs of your investment including legal fees, stamp duty, and any other establishment costs. And above all make sure you check and disclose everything your broker or lender asks for. It all turns up in the credit check and application process anyway and transparency is essential with the banks.