Being in the industry for more than 10 years and living through what used to be a complex but reasonably straight forward industry has really had some significant changes to the process. The introduction of heavily compliant focused processes, as well as in-depth living expense verification, has increased turnaround times and percentage of applications being approved.

Earlier in my career, turnaround times and even credit policies were a walk in the park. There was no compliance, no living expense verification and properties were about a third of the price they are now. The levels of applications submitted were also about half what they are today. Fast forward ten years and everything is quite the opposite.

I am going to go through the general home loan application process and provide a reasonable outlook on the anticipated time it takes to get a loan approved.

Preliminary Assessment & Pre-Approval Application

During the pre-assessment stage, we will calculate how much you can borrow. We will inform you of possible questions that may arise from lenders and eliminate the lenders that may not provide the funds required or accept the circumstances that we are working toward.

Depending on which lender we proceed with, the process of ascertaining a pre-approval can be instantaneous with some lenders issuing a system generated pre-approval, whereas most lenders will fully assess pre-approvals like a formal application to ensure income verification and provide customers with more certainty on their home loan application. The time will vary anywhere between two business days and up to ten business days depending on the lender.

The standard documents that are required for all full document home loans are as follows;

 – 2 most recent payslips with a most recent group certificate for PayG applicants

 – 2 full years financials including all personal, trust and company returns with matching notice of assessments for all self-employed applicants

 – 3 months statement history of salary account to confirm living expenses and to establish any undisclosed liabilities

 – Drivers Licences

 – Passport

 – Medicare Card

 – Confirmation of funds to complete the purchase

Once the lender has all the relevant information and documents, they will assess whether you meet their home loan requirements. If you qualify, they can issue a pre-approval for your loan.

Most pre-approvals have a 90-day validity.

If you have started your property search, a pre-approved loan can be beneficial. A home loan pre-approval provides you with a maximum purchase price and also provides you with peace of mind that you are considering properties that you can afford, and you can move quickly to make an offer.

 It may just put you in a stronger negotiating position than other potential buyers who don’t have pre-approval.

Making Offers and Signing A Contract Of Sale

Whether you are purchasing at an auction or making an offer on a private listing, the agreement only becomes legal when both parties have signed a Contract of Sale (Offer of Acceptance in WA).

This contract will identify the purchase price as well as any special conditions. If you are making offers of private listings, you will generally have a subject to finance clause which provides a period; usually, 10 business days, to ascertain finance. If your finance is not successful, any deposit is returned to you, and you face no legal repercussions.

I suggest that all purchasers request a subject to finance clause even when a pre-approval is held to cover any potential issues that may not be experienced even with the valuation of the property. If you purchase at auction, you are buying the property unconditionally, meaning that you have no cooling off period and if you are unable to ascertain finance, could end up losing your deposit and being sued for the balance of the outstanding amount. You may also choose a building inspection report or pest inspection.

A valuation will need to be completed on the property to confirm it is acceptable by the lender. This part of the process can take up to five days to be completed as long as there are no issues experienced in booking the valuation and accessing the property. In some instances, a full valuation is not required where the lender will accept the purchase price and is generally on properties that fall within the average prices of the suburb and the overall lending is 80% and under.

There may be other outstanding documents that are required for formal approval and are generally outlined in the pre-approval letter provided by the lender.

Formal approval

Once all documents have been verified, and all requirements met, the lender will issue a formal approval. Letter of offer documents will be sent by the lender’s solicitors, which will then be onforwarded to the customer to be completed and returned.

Once these documents have been completed and returned, the lender will certify them and confirm they are ready to settle the application.

Summing up

The time to have a home loan application approved has increased due to the lenders having to perform more checks and be more thorough in their assessments. Presently, without requesting escalations on files, turnaround times are generally sitting at approximately eight to ten working days from submission to settlement.

Depending on the circumstances and timeline required for settlement, escalations can be requested, and the turnaround time can reduce but will depend on so many factors, especially on the lender of choice.

I will always advise the expected turnaround time will take up to two weeks just to provide customers with realistic expectations, so there is no false hope. Obviously, if a response is received back within the first week, then expectations are more than fulfilled, and all parties are happy.

If you would like to discuss any of the above in detail or have any questions that I can answer, please get in touch through PropertyInvestingFinance.com, or for more urgent help, you can give us a call on 1300 992 260.

The post The Home Loan Process in 2019 appeared first on PropertyInvesting.com.

Should I Refinance? This is the most commonly asked question I receive during my appointments.

Am I missing out on anything by staying with my current lender? How does refinancing work?

I am going to run through these questions and help you decide if refinancing is something to consider or if your existing home loan is competitive and provides all the requirements you expect from your home loan.

What is refinancing exactly?

When you refinance, you’re replacing an existing home loan with a new one. This can be with the same lender, but most of the time is switching to another lender to benefit from a more competitive interest rate or particular products and facilities that the existing lender cannot offer. There are numerous reasons why we refinance a home loan, and this can include freeing up funds for a renovation, purchasing another investment, or to take advantage of a better interest rate.

Is refinancing the best option for you?

If you haven’t reassessed your existing home loan in the last four years, then it’s time to contact your mortgage broker and confirm that your current home loan product is still competitive. Given the amount of competition and available home loan products on the market, it is more than likely there will be a more competitive option to save you thousands of dollars.

Are you looking to access the equity in your property to purchase an investment property or complete renovations around your existing home?

A common reason people refinance their home loans is to access the equity to complete home improvements or buy an investment property. If your current home value has increased and equity has built up, you may be able to access this equity in the form of cash to fulfil these options. Rather than spending your savings, this is a good approach as it allows you to provide a deposit for your next purchase. If the funds are used for an investment purchase, they will also be eligible for tax deductibility.

Do you want a more competitive interest rate?

Good mortgage brokers stay up to date with interest rates, incentives and products offered by lenders.  The everchanging home loan market is very competitive, and lenders are always creating new ways to win your business.

Most of the time, people consider refinancing to save on the monthly interest they are paying with their current lender. Even a minimal difference in your interest rate could save you thousands of dollars during the life of your loan, ultimately helping you pay off your home loan faster.

While this is in the best interest of anyone with a home loan, there are so many lenders providing so many products that it can take hours of your time researching these trends and can become very confusing. Not all home loan products are the same, and home loans that offer lower interest rates often lack the benefits of higher-rate products, and may not have all the features of your existing mortgage.

Sometimes, getting a lower interest rate can be done without the hassle of refinancing. In many cases, we have been able to negotiate better deals with our clients’ existing lenders just by asking!

Have your personal circumstances changed?

You may want to refinance if you have experienced a significant life change. An example of this is a change in employment resulting in a lower income, or a change in marital status. Taking out a new home loan may enable you to consolidate your personal loans and credit cards into one facility, providing you with lower monthly repayments and savings in interest.

Do you want to change your loan type?

Switching your home loan from variable to a fixed may allow you to improve your interest rate without changing lenders. Maybe you want to split your loan providing part variable and part fixed rates. In either case, you may need to refinance depending on the type of home loan you have. We can assist you to decide which loan structure is the best for your requirements.

Over the past month or so, there have been a few banks who have increased their standard variable interest rates. These lenders are not majors, but given there have been these few, may indicate that a rate hike is on its way across the board and more reason to consider fixing your loan to enable you to reduce your monthly repayments.

So, you have decided to Refinance? What’s next?

Once you’ve decided to refinance, the process is relatively simple as long as you have the right assistance.

Without the knowledge, refinancing can be very confusing and challenging. We can help you submit your application, which will involve providing ID, proof of income, completing application forms and following up outstanding documents. Lenders will often require you to get a valuation of your property to determine how much you can borrow, which generally requires a property inspection by a licensed valuer.

Once the lender is satisfied, you’ll receive approval with a copy of the loan contract to review, sign and return. When you’ve done that, your new home loan will be drawn down, and money will become available.

Get in touch if we can help.

Your decision to refinance or not will come down to your circumstances and financial situation. We will help you choose the best loan solution for your needs.

For prompt and expert assistance, please register your interest at PropertyInvestingFinance.com, or for more urgent help, you can give us a call on 1300 992 260.

The post Answering Your Questions About Home Loan Refinance appeared first on PropertyInvesting.com.

Many lenders offer products that provide different approaches to specific policies. The reason behind this is to assist them in standing out from their competitors in the market.

In this article, I am going to discuss some of the ‘niche’ policies that lenders offer that could assist in your lending application that many lenders may not consider.

Lender Servicing Capacity

Working as a mortgage broker, I have access to over 40 different lenders, and the various software that we use provides an estimated borrowing capacity based on the same income, liabilities and any other factors that are considered when applying for a loan.

I receive numerous calls from clients advising that they have been with a particular bank who will only provide them with an amount that falls well short of being able to purchase the property of their dreams. The reason is every lender has very different ways of crunching the numbers, and in some instances, finding the right lender could mean an additional $200-300k in borrowing ability compared to another lender.

Some of the things that lenders look for on an application that may vary from one lender to another include:

• How they calculate existing home loan repayments
• The minimum living expenses factored into an application
• The minimum repayment required to be factored in for credit card limits
• The amount of bonus/commission income the lender accepts and over what period it needs to be confirmed (i.e. minimum three months history or minimum two years)

Although the above points may not seem like they make a big difference, this can definitely make or break an application.

For example, some banks use an increased interest rate to factor in any future rate increases instead of the actual minimum repayment. This can add thousands of dollars to your monthly expenditure and decrease your borrowing capacity considerably.

Maximum LVR (Lending to Valuation Ratios)

This tends to affect first home buyers who have gone into the local branch and are advised they would need a 20% deposit before even being considered for a home loan.

Certain lenders will provide a loan up to 100% inclusive of the mortgage insurance premium to purchase their first home. This does not mean that you will not require a deposit, but it will provide the ability to use a minimal deposit to get into your first property. The data at right shows a transaction based on a $600K purchase in Victoria as a first home buyer.

Although the Lenders Mortgage insurance is quite high, it still gives a first home buyer the opportunity to buy their first home up to a value of $600K with only a $40K deposit. Many mainstream lenders would need a minimum of $120K before even considering taking on the borrower.

Maternity Leave

Maternity leave is a common issue (when it comes to lending) that many people are advised will affect the overall servicing capacity. In many cases, this leaves the income entirely out of the picture although there is a plan to return to work. The majority of lenders will not consider applicants on maternity leave, but there are a few lenders that can accept the full income as long as the following requirements are met:

• A letter can be provided confirming a return to work date
• Applicants hold enough funds in savings or redraw that will cover the minimum repayments until the return to work date
• They have been with the current employer for a minimum of 12 months

Losing an applicants full income can make an enormous difference to the overall servicing, and many would-be buyers miss out purchasing a property because they have been given limited information.

Bonus/Commission and Overtime Income

Bonus/Commission and overtime income have in recent times gone through some significant changes, especially over the past 12 months. What used to be accepted in full has now changed and is shaded by lenders with the requirements to confirm the income being part of the industry the applicant works in. Otherwise, it may not be considered.

Some lenders will consider using the full amounts with a minimum of 6 months history without any additional information being required. Other lenders will need to calculate the annualised year to date from the most recent payslip, separate the base from the additional income, shade the additional income at 80% and then confirm that the income has been received for the two previous years via the group certificates provided.

This income requirement certainly varies from lender to lender and again could be the reason your application gets approved or declined.

Casual Income

This is a big subject in lending at the moment and one that is treated very differently between different lenders. Some lenders will accept it after receiving their first payslip, others require a minimum of six months income and justified by a letter from the employer confirming the minimum hours with a character reference. Some lenders simply will not accept casual income without 12 months history and a group certificate to confirm this.

A Case Study

An applicant that I have dealt with before is a Doctor that has recently received the great news that she has baby number one on the way. She and her partner are currently residing in a small one bedroom apartment and looking to buy their family home. The female applicant receives an income of $108K per annum and her partner has recently relocated from WA and started a new role in Melbourne in April at $62K as an accountant.

Given that she is currently on maternity leave, we have had to look at the lenders that offer the ability to consider her income based on her last payslip, a group certificate, employment contract and a letter from her employer to confirm her return to work date. In addition to this, her husband, although full time, has started a new role and is still on his probationary period.

Taking this into consideration, we had to look at a lender that was going to consider both incomes as we required both to service the loan amount we were applying for.

Factors like a low LVR of 45% as well as history within their industries did naturally assist with the loan being approved, but we succeeded in the getting approval at $800K.

Summing Up

It makes a  significant difference in the process and assistance provided when you are dealing with a lender/mortgage broker who has worked in the industry for some time and has worked through many different scenarios with many different lenders. This provides a very broad knowledge with the ability to fit most scenarios with a lender, no matter how complicated it may be.

I have worked in the finance industry for fifteen years, the majority of these as a mortgage broker and, like any industry, I have learnt from my mistakes. This has enabled me to think outside the box and provide a solution for most scenarios.

If you have a tricky or complicated matter that you need assistance with and seem to be hitting brick walls with other mortgage brokers, then head to PropertyInvestingFinance.com and fill in the online questionnaire, and we will make a time to have an in-depth discussion about your situation. Alternatively, you can give me a call any time of 0477 212 840.

The post Different Lenders with Different Policies appeared first on PropertyInvesting.com.

Low doc home loans are available to small business owners, where tax returns and financial statements are not available for evidence of income. Depending on how creative an accountant can be, I have seen some cases of applicants running multi-million-dollar businesses who have not paid tax for the first ten years. Although this is great from a tax perspective, when it comes to buying a home or investment property, it may not be so great!

These days, lenders are becoming more critical on the assessment of applications, third parties such as ASIC and APRA are being introduced to monitor lenders, and brokers are following strict guidelines. With these changes in place, the hoops applicants have to jump through are becoming harder and harder.

For your typical mother and father who work for employers and don’t have the burden of things such as BAS and GST, there are no real hurdles for them to jump through. But for self-employed applicants who have huge expenses and creative accountants, borrowing money is becoming harder. Changes in the lender’s policies are also providing more obstacles for applicants to ascertain finance.

Two Low Doc Lending Options

Low doc lending provides two primary choices. The first is to offer limited financials such as business banking statements to verify income being received in addition to quarterly BAS statements to confirm that the income is being lodged with the ATO. The second option and the minimum required documentation option is an accountant declaration only.

Considering the first option of providing Business Banking Statements/BAS statements, out of the two options available, this is the more favourable choice of low-doc lenders. The reason being is that it provides the lenders with additional comfort of turnover of the business. The general rule of thumb to work out income in this instance is to take the last 12 months BAS statements, add together the gross sales, then use 40% of this figure as annualised income.

For example, if the business is turning over $1M per annum and this can be verified via 12 months BAS statements, then we can use up to $400K as declared income to service the loan.

The second option for low doc lending which is also becoming limited in its availability is accountant declared income. This option provides the minimum financial information and is simply a one-page document completed by the accountant to confirm a gross figure of income. This figure is then used to service the loan. No other financial information is required.

Given that this type of low-doc lending is considered as a “higher risk” by lenders, some of the rules differ to that of normal lending. Majority of lenders, especially the major banks that offer low doc lending limit loans to a maximum of 60% of the property value. The lenders that provide a higher LVR (Lending Valuation Ratio), in most cases require a ‘risk fee’ or Lenders Mortgage Insurance (LMI) to be included in the transaction to cover them from any financial loss.

In most cases, the interest rates and costs of low-doc lending are higher to that of a full doc because of the higher risk imposed. These fees are calculated based on the overall value of the loan and the total LVR. Currently, Low-doc lenders are offering interest rates as low as 4.5% and as high as 9.99% depending on your circumstances.

If you are looking to borrow a total of $500K and your property is worth $1M, your business has been operating for more than 2 years, and you have 12 months BAS Statements to provide, then you would be considered a lower risk and will be eligible for rates in the same vicinity as full doc lenders.

If you have been operating for less than 12 months, can only provide an accountant declaration and have a 20% deposit, you still have options to be considered, but as you would be regarded as a high-risk applicant, you would be looking at the higher end of the scale regarding interest rates and setup costs.

A Case Study

A self-employed carpenter who purchased a home a few years back when he was completing his apprenticeship and working for an employer with a steady income (PAYG) has since started his own business and gone out on his own. The company is entering its third year of trading, and things are going rather well. He and his employees are working around the clock, and he hasn’t had a chance to complete his financials for the current financial year but has found a property that he’d like to purchase as an investment.

He has managed to save up $150K to use as a deposit and the investment property is on the market for $350-$400K. The applicant’s accountant has lodged his BAS statements for the past 12 months, and the business has a turnover of $800K. Based on this turnover, most lenders will accept a maximum of 40% of annual turnover, meaning we can declare up to $320K per annum.

Although we have the availability to use a maximum of $320K, he confirms that he does not believe he will earn anywhere this amount and advises that $200K would be a more accurate figure. Factoring in the current expenses and other liabilities into the picture, servicing is evident on $200K and given that this falls within the maximum declared income amount, the loan is a strong application and has a good chance of being approved.

I have found that low-doc applicants are generally shocked because they have spoken with other brokers and lenders prior and as they do not have any experience in low-doc lending and base servicing on their previous tax returns which are outdated and don’t provide a true reflection of income, there is little to no chance of getting their applications approved.

Summing up….

Don’t think that because your tax returns haven’t been done or you have fallen behind with your financials that you have no chance of ascertaining finance. I am self-employed myself, and I know it can be challenging to keep things up to date and providing items to your accountant on time is difficult when you have a business to run.

There are workarounds and given that I have experienced difficulty getting lending in the past and have worked with many applicants in the same situation, have learned that on most occasions, there is a resolution. Always get a second opinion and make sure you confirm that the lender/broker you are dealing with has experience in low-doc lending.

Need some help? 

Would you like to put my experience and finance network to work to see whether you qualify for a low doc self-employed loan – at no cost and without obligation? Just head to PropertyInvestingFinance.com, complete and submit the online form, and I’ll be in touch with you as soon as possible.

The post Low Doc Home Loans for the Self-Employed appeared first on PropertyInvesting.com.

Until now, lenders have used a system called the Household Expenditure Matrix (HEM) to estimate applicant living expenses. HEM is an average figure of monthly expenses determined by the median spend on absolute basics such as food, utilities, transport, communications, kids’ clothing, plus some discretionary basics, such as alcohol, eating out and childcare. Unless indicated in the application, this median amount has been used for all applicants, no matter how expensive an applicant’s lifestyle.

Each lender calculates their HEM values differently, but on average, HEM expenses are estimated at approximately $1,650-$1,800 per month, per person. This figure relates to the primary applicant; then there is a lower figure added in for a partner, and lower figures again for each dependent child.

Since the Royal Commission, lenders and brokers are now required to ascertain a full breakdown of exact monthly living expenses as part of the application process. When interviewing an applicant, I now include a detailed expenses breakdown so that applicants can provide what they believe reflects their monthly expenditure. Some of the information I ask for is:

• Estimated amounts spent on groceries
• A breakdown of recreation and entertainment expenses
• Costs involved with the operation and servicing of motor vehicles
• Education expenses
• Expenses related to owner-occupied bills

As part of the application process, brokers are also required to obtain three months of salary statements to confirm income credits and also to verify that there are no undisclosed liabilities. Some of the commitments I’m noticing are not being included or are being underestimated by applicants include interest-free credit cards, insurances and education expenses relating to dependent children.

A Case Study

I recently completed a pre-approval for a new investment purchase for one of my clients before the changes were introduced. At the time, the application serviced comfortably. After a few months, the applicant came back advising that he had made an offer subject to finance, which had been accepted. Given the pre-approval had expired, we had to reapply under the new requirements, with the addition of the salary account statements.

After reviewing the statements, I found a Mercedes Benz finance repayment of $1,523 per month as well as a GO MasterCard payment which had not been disclosed. I also noticed a payment of $8,000 which was paid to a prestigious school In Melbourne’s inner east. In the initial fact find, the client had listed only $300 in education expenses.

I questioned the applicant about these expenses, and sure enough, the education expenses were $32,000 per annum. I also learned there was a $75,000 car loan being repaid and an interest-free credit card for furniture with a limit of $10,000.

Once I took these additional expenses into servicing, the applicant’s ability to borrow had reduced to almost zero, and he had to walk away from the purchase. He could not afford to proceed based on what his actual expenses reflected, even though he told me he would have no problem making the future payments.

This is the perfect example of people living beyond their means and in my opinion, the reason why the royal commission has stepped in and made some significant changes to prevent people from experiencing future financial hardship. I know that there are a lot of brokers and applicants who don’t like, nor agree with the changes because they are finding it harder to gain finance approval for their clients. However, in my opinion, the tighter restrictions will likely be a good thing long term.

My Top 3 Tips For Property Investors

Here are three recommendations if you’re hoping to get a loan to buy an investment property:

1. Stop going into debt for stuff you don’t need. 

Working in finance for the past 16 years, I have seen many changes, but the past few years have been the most significant with property prices exploding and people financing everything from motor vehicle purchase to overseas holidays. People are just unable to wait for anything anymore. It’s rare that you see people save these days and instead, turn to using the equity in their home because it’s easy and it provides that ability to buy stuff quickly.

2. Know where your money is going.

The expectation from others to “keep up with Jones’s” is at an all-time high. People are eating out a lot more and the price that we pay for things like food these days is way beyond what it was ten years ago.

They say that Melbourne has the best coffee in the world, but we indeed pay for it! My partner and I sat down to look at our expenses, and between the two of us, we had two large lattes a day from the local coffee shop at a cost of $5 per cup. Multiply that by 365 days, and that equates to $7,300 per annum!

Just to put things into perspective, a $200,000 Interest only home loan on the average interest rate is approx. $9,000 per year!

We are now the proud owners of a coffee machine and spend about $40 per month on coffee. It’s these little things that add up and make the difference between being able to buy a property or save for the next family car. It pays to sit down and have a look at where your money is going.

3. Differentiate between ‘wants’ and ‘needs’.

If you are unsure about the changes currently taking place and how they may affect you, we can discuss what you can do to help your financial position going forward and how making a few simple tweaks to your lifestyle, will improve your chances of pursuing your financial goals faster. Giving up some of life’s ‘wants’ rather than ‘needs’ and differentiating between the two, can make the world of difference.

Summing Up…

Summing things up, the royal commission changes are and will continue to affect lending overall, and unfortunately, it’s not going to be favoured by many people. There is a reason for the changes, and it’s for the benefit of you, the consumer, to ensure you aren’t left in a position of financial hardship and potentially lose everything you have worked hard to build.

Need Some Help?

Would you like to put my experience and finance network to work to see whether your interest rate and / or finance deal is the best possible in today’s competitive loan market – at no cost and without obligation? Just head to PropertyInvestingFinance.com, complete and submit the online form, and I’ll be in touch with you as soon as possible.

The post How the Royal Commission May Impact Your Borrowing Power appeared first on PropertyInvesting.com.

In layman’s terms, this means APRA will announce how much extra capital they will require the banks to hold to act as a buffer to absorb possible loan losses. Since the global financial crisis, Australia’s banks have been required to increase the amount of capital they hold several times. Every time they do this, mortgage prices invariably rise. This is because most banks and lenders are highly leveraged, so any increase in capital decreases their return on equity, which can have a drastic effect on their share prices, and likely on the bonuses of their executives.

How Will This Affect Borrowers and Investors?

The aspects of the inevitable announcement that will effect borrowers the most depends on how much money the banks need, as well as how much time they will be given to raise the money. These are important factors because they will affect how fast the extra capital accumulates, which will affect the bank’s interest rate policies.

The best-case scenario for borrowers and investors is if the amount of extra capital the banks require ends up being relatively small. However, even if it is large, borrowers and investors may not bear too much of the brunt of the changes if APRA phases the requirements in over an extended period. A long lead time before the additional funds must be in place would make the changes more tolerable. Additional time would give the banks the opportunity to raise equity through existing dividend reinvestment plans. It can also enable the banks to decide to keep dividends flat and retain a higher share of profits.

How Will This Affect Banks?

If the banks are required to raise significant funds inside a relatively short time period, they will need to pass the cost of those higher costs to borrowers in the form of higher rates. Not doing so would have too great an effect on their profitability. Competitive forces may eventually pressure lenders to pass some of the costs on to shareholders. But, this would be a slow and drawn out process and of no comfort to those already in the mortgage market or about to enter it.

Recent reports suggest that APRA is considering placing stricter requirements on “domestic systemically important banks” like Commonwealth Bank, Westpac, National Australia Bank and ANZ Bank – the Big Four. This could potentially place these lenders at a competitive disadvantage compared to smaller lenders, as it would impose a cost on them that would not affect their competitors.

Will the Fallout Be Worse for Investors?

Yes, it is most likely that investors will feel the most pain. APRA has flagged changes in the way it calculates risk, which impacts the amount of capital banks are required to hold against different types of loans. They view investment and interest-only loans as being riskier and will invariably attract higher capital requirements. That means the banks will have to pass this extra expense on to borrowers in the form of higher interest rates.

APRA last imposed increased capital requirements on investment loans in 2015. At the time, they gave the banks only 12 months to comply. What resulted was a rather rapid increase in rates charged for investment loans, even above rates for other mortgages, during that period. According to industry sources, the banks will not implement similar future changes as rapidly

What Should You Do?

The primary way you can insulate yourself from the effects of the inevitable changes is to fix your interest rates. But, before you do that, you must also consider the possibility of further rate cuts by the Reserve Bank (RBA). It is highly possible they are making these changes to allow the RBA to further decrease rates without further inflating property prices. A lower RBA cash rate would offset higher bank margins, giving them more wriggle room to keep profitability up. Weak wages growth, low inflation and slow economic growth all make further cuts by the RBA possible.

The other thing to consider is that these changes will not directly affect all lenders. APRA does not regulate many of the non-bank lenders, so while the activities of banks affects all parts of the finance sector, and the government can exert pressure on other lenders through the Australian Securities and Investment Commission (ASIC), the changes will not influence the pricing policies of these businesses to nearly the same extent.

A Silver Lining

Most borrowers do not have the most suitable loan structures or best rates currently in place. You may have more power than you think to save money, even if rates do rise across the board. These times of uncertainty that we are currently experiencing present a unique opportunity for investors and borrowers who are willing to put in a little effort to give themselves a considerable advantage over their peers. A small cost advantage today can translate into significant long-term gains.

If you would like an expert to look over your existing loan portfolio, get some advice on how best to start, or if you have any other finance-related queries, please fill out the form at PropertyInvestingFinance.com, or email me directly.   

The post Be Prepared for More Tightening from APRA in the Mortgage Market appeared first on PropertyInvesting.com.

However, before we get into that, I need to cover some important information that is essential in totally comprehending the five ultimate ways to generate cash in a business.

The Nexus Point: Your Foundation to Great Profits

The only time a business makes money is when it is engaged in the nexus point. The nexus point is when your business – you or your agent, your website, your salesperson or your advertising – meets a client or customer. While accounting, paperwork, team meetings and other business activities are essential, none of these endeavours creates a nexus point opportunity, which is the opportunity to make money.

There are only two areas that create a nexus point: sales and marketing. Only sales and marketing produce customers, and customers are your only source of income.

Many people think that marketing is about getting customers to the door. Marketing, of course, is much more than getting them to your door. It’s also about keeping them. It’s about knowing how to apply direct response marketing to your business to generate immediate cash profits. 

Direct response marketing is the ability to launch scientifically tested and measured strategies that create cash in your pocket in 60 days or less. Keep the nexus point in mind when you read the five ultimate ways to generate cash. You will see how it relates to many of the areas.

Your Five Cash Generation Strategies

These are the only ways you can make money in a business. Let’s talk about how to actually make a business profitable.

Here are five effective ways to increase cash flow in your business:

1. Cut Down on Expenses 

Most businesses wait until tough times before they reduce their expenses or overhead, but it is better to do it when things are going well. If you can eliminate what is unnecessary, then you can maximise profitability.

How can you cut down on expenses? Make a list of all your unnecessary overheads and expenses. Remember, most business owners only do this when things get tight. The best time to do it is before things get tight. Trim the fat, but obviously, keep your necessary expenses.

2. Increase the Number of Clients

Boosting your client base is definitely an area where the nexus point is crucial. Make a list of how you can increase your clients. Brainstorm this with your associates.

3. Increase Your Transaction Price 

For example, if you’re a hairdresser and you charge $45 for a haircut, and you raise it to $55, you have increased the purchase price. Is it possible to increase your transaction price on any of your products or services? If so, make a list.

4. Increase the Number of Purchases 

Increasing the number of purchases from the customers or clients you already have is a philosophy called maximisation. How do you maximise a client? You raise the number of purchases or the frequency of purchases from the customers you already have. Again, this is another area where it is essential to use nexus point thinking.

This principle of maximisation can be a profit revolution for many businesses. This may sound elementary to you, but let’s just take an example. Let’s say that you have 100 loyal clients, and they purchase from you twice a year.

What would happen to your business if you could get them to buy from you one more time per year – or, instead of twice a year, three times a year? Your business could go through the roof! Think of the amount of profit you could generate by providing a way where they could purchase from you more often.

Does that make sense to you? This is powerful, yet extremely simple. Write down how you could maximise your clients. Remember, it is easier and less costly to work with your current clients than to go out and get new clients. Burn these three things into your mind:

• Up Sell – Up selling is getting existing clients to purchase more expensive products or services.
  
  
• Cross Sell – Cross selling is encouraging clients to buy other products or services.
  
  
• Repeat Purchases – Repeat purchasing is increasing the amounts of times clients buy their staple product or service. Brainstorm to make a list of how you can accomplish this.

5. Make Your Business a Saleable Asset 

To have a cash generating business, you need to develop a business that’s a saleable asset. For some businesses, this is not possible. There are some businesses, that, if the owner moves on, there is nothing to sell, because all the expertise is with the owner. Is it possible to set up your business to sell it in the future? If so, make a plan and write down what you need to do to accomplish this.

I hope you can utilise this information to create more success and have the lifestyle you truly want.

If you missed my last post, be sure to read, “The Ultimate Key to Making Money in Business.”

The post The Five Ultimate Ways to Generate Cash appeared first on PropertyInvesting.com.

The Australian Prudential Regulation Authority (APRA) has ordered banks to lower the proportion of new interest-only lending to 30%, forcing them to increase the relative cost of these products to dampen demand. While non-banks are not technically obligated to adhere to the same standard, you can be certain they have experienced back-door pressure from APRA to follow suit.

The goal of our regulators in taking this action is to diminish investor appetite for property, in the hope of avoiding further inflation of the perceived property bubble without raising interest rates.

What APRA’s Latest Moves Mean for You

There are many in the industry who think the differential between rates is now so large that IO loans are no longer viable; however, I disagree. When considering how to best structure loans, it is wise to look at the long-term, after-tax cost of that structure, as well as its effect on the flexibility of how you can use and access your money.

Every dollar you use to pay down an investment debt is a dollar that you cannot use to pay down a personal debt. This means, as in the case where an investor also has a loan on their personal residence that is not tax deductible, every payment against an investment debt increases the future after-tax cost of their overall debt.

It is necessary to make a calculation, including tax effects, as to whether the lower rate is less expensive now and, even if it is, will it continue to be the case into the future? It will be heavily dependent on the income generated by your assets and the level of your other income.

Paying off principle, rather than storing cash in an offset account or Line of Credit (LOC), also makes cash more difficult to access. It puts you in a position where, if your circumstances change, you may not be able to access the equity on your investment properties at all. There is potential that, in the future, you might miss opportunities you would have taken up if you had access to capital.

You must also recognise there is somewhat of a finality relating to paying off an investment debt. Once you pay it down, any new borrowings against that property will likely only be tax deductible, if you use it for further investment. You will have to take out a loan with no tax deductions allowable on the interest to pay for that new car or dream holiday. And if you’ve stored those same repayments in an offset account, you could pay cash and potentially maintain the tax deductibility of all the debt against your investment property.       

Notably, while the current trend is towards the pricing differential becoming larger, between IO and P&I loans, this is only a new phenomenon. It may not last. Switching to P&I may save you a small amount of money now, but it is far from certain this will still be the case in 12 months, let alone in 5 or 10 years.

What Should You Do?

It is sensible to periodically consider your loan portfolio to make sure you are minimising your costs and maintaining the level of flexibility you are comfortable with. Given the rather significant changes in rates of some mortgages recently, it is most definitely an opportune time to reassess your current situation. But, you should consider all the factors we mentioned above, and not just the percentage rate of your existing loans compared to other products.

If you would like one of our lending experts to assist you in assessing your current situation and/or if you would like to know what options are available to you, please fill out the form at PropertyInvestingFinance.com, or email me directly.

The post Why Interest-Only Rates Are Soaring and What You Should Do About It appeared first on PropertyInvesting.com.

So, what isn’t your banker telling you? Here are the three most important things:

1. Your banker has limited options for you.

She isn’t afforded the opportunity to be impartial. Maybe your banker is in a position to offer you the best finance solution, or maybe not. She lacks the incentive to advise you of possible alternatives outside of her institution.

If her best solution isn’t your best solution, she likely won’t mention it. This doesn’t mean she isn’t trustworthy or honest as a person. Knowing all your better options isn’t in her job description. Her role is to sell you products offered by her employer on terms that are most beneficial to the bank.

The lack of impartiality of bankers often leads to customers accepting sub-optimum rates and, more importantly, poor loan structuring. It is in the bank’s interest to have as much control over you and your assets as possible. The bank’s default position is generally to take as much security as possible whether it is necessary or not.

2. Your banker is secretly incentivised to sell you a specific solution.

Your finance choice when dealing with a bank may impact your banker’s income, but you’ll likely never know it. For example, she may receive benefits for the advice or products she recommends to you.

You’ve probably heard a lot in the media about the commissions that mortgage brokers and financial planners earn from selling financial products.  Both of these professional groups are now required to fully disclose to the client any benefits received. I doubt you will ever hear your banker disclose the terms of her employment.

Bankers are generally incentivized in some way. This may be in terms of the volumes of sales made, success in cross-selling, or in the size of the portfolio managed.

You yourself have probably experienced a banker trying to sell you a secondary product, such as insurance, when seeking a loan. This can be annoying and can lead to sub-optimum decisions by buyers of financial products.

Often, the best interests of the banker and the customer is diametrically opposed. A very common example of this is when an investor frequently flips properties. If the banker is incentivised by the size of the loan portfolio she manages, then a sale at the wrong time can affect her bonus.

In other cases, a client may be managed in one part of a bank but may be more suited to another area. This happens most commonly where there is a change of strategy by the investor. For example, if you move from a buy and hold strategy, where the residential lending or private banking areas are probably most suitable, over to property development or investing in commercial property, then you may not be referred to a business banker, where you would likely be better suited. If she hands you over to her colleague down the hall, she loses you as a client and may lose money.

3. Your banker is eyeing a better job.

If your banker knows what she’s doing, she probably won’t be with you for long. A good banker, one you not only trust but feel good about working with, can be very valuable. The problem is she is not only valuable to you but to lots of other people too. Unless you are already managed by a very high-level banker then she is most likely going to be promoted quickly or else she will move banks to further her own career.

Keep Your Eyes Wide Open

Lenders are an important part of the financial system. If you are going to be a successful investor, you will need to deal with them, whether you use a broker or go directly to a bank.

Knowing what your banker will never tell you should help you to better manage your relationships with these professionals and better evaluate the advice and information you receive from them.

If you have any queries about dealing with bankers or would like an independent view about some advice you have received, either click here to fill in an enquiry form or contact me directly on email.

The post 3 Things Your Banker Doesn’t Want You to Know appeared first on PropertyInvesting.com.

For the most part, only corporate bonds and other forms of institutional loans will attract the levy. However, banks view some customer deposits as liabilities on their bank balance sheets. That means the change will also impact some of these accounts as well.

The proposal includes an exemption for deposits of individuals, businesses and other entities protected by the Financial Claims Scheme (FCS). These are deposits of up to $250,000 per account-holder per institution. This will exempt most personal deposits, but there will still be a significant number of people whose savings will not be exempt when they introduce the new levy on July 1, 2017.

How Will This New Charge Affect Customers and Is It Fair?

This new levy is expected to raise around $1.5 billion per annum for the federal government. In concert with the announcement came the expected bleating by politicians. Treasurer Scott Morrison said the big banks are sufficiently profitable, so they should just absorb the cost. He added, “Asking the banks, I think reasonably and fairly, to contribute to the work of budget repair is consistent with liabilities around the world.”

The fact is, the levy is an added expense for the institutions that are affected. The only way it would not be passed on is if those institutions decided they were prepared to accept a lower profit margin. This is not going to happen. The immediate effect of the news about the proposed changes on the share prices of these companies was a hit by close to $14 billion on their combined market capitalization. That was just on one day. It’s only a precursor to what would happen if they downgraded their profit margins moving forward.

So, What Will Happen?

The simplest response from the banks would be to reduce interest rates on funds that attract the charge, but this is unlikely. Banks will be reticent to slug large depositors with the bill because they are highly attractive customers. The most likely scenario is to spread the cost amongst deposit holders by lowering deposit rates.

What about mortgage borrowing costs? You can bet the levy will inevitably affect future interest rate decisions on the lending side, as well.

You, the Customer Will Pay for It!

The question around fairness is quite a bit more complex. The big banks receive a virtual taxpayer subsidy because their borrowing costs are lowered by 0.17% annually. This is because rating agencies lift their credit ratings two notches having deemed them to be “too-big-to-fail”. In other words, if they get into trouble, the government – really, the taxpayers – will bail them out.

Without this support, the four AA- rated major banks could end up with a much lower A rating. Macquarie would likely fall from an A to BBB+ rating, putting it in line with Members Equity Bank, but below Bank of Queensland and Bendigo.

After factoring in the Government backstop, the 0.06% levy claws back just 35 percent of the competitive advantage that being “too big to fail” affords them.

It is also important to note that the Senate’s inability to approve $13 billion of zombie savings (spending cuts that don’t have any hope of winning parliamentary approval) was threatening the Australian Government’s AAA rating. The loss of the AAA rating could really hurt the banks, lowering the credit ratings of the four major banks from AA- to A+. Reports say this would most likely lead to an increase in funding costs of about 0.10 percent annually, which is more than the cost of the levy.

There is a legitimate argument whether the government should intervene in the financial sector at all, or at least to the extent that it does currently. But this is not material in terms of whether the current proposal is fair or not. It is patently fair that businesses who enjoy a definitive competitive advantage because of support from the federal government should contribute to its financial stability.

What Does This Mean for You?

It doesn’t mean a lot for you because the financial system is made up of many different types of institutions. Every time the government imposes a new legislation on the sector, it affects each lender differently. This is why it is important to continually review the institution you do business with. Make sure you are not costing yourself money needlessly.

If you would like an expert to look over your options with you, please fill out the form at PropertyInvestingFinance.com or email me directly.

The post What Does the New Levy on Big Banks Really Mean? appeared first on PropertyInvesting.com.