Loans Australia Property Finance Blog

Since the RBA announced its 1% interest rate cut, with lenders generally passing on the .8% to their clients, I have made some startling observations.

1. Some lenders are choosing not to pass any of the interest rate cut onto clients.
2. Some lenders are, to put it bluntly ‘culling’ their clients. This means, they are increasing interest rates in an effort to get ’some’ clients to move on (ie refinance to another lender). In some cases they are telling their clients they have as little as one month to refinance. Generally, this relates to commercial clients, developers, no document clients with second tiered lenders or people who don’t pay on time. Harsh isn’t it!
3. Lenders continue to change their lending policies and pull products off the market.

If you feel that you have been negatively impacted by lenders who refuse to play ‘fair’ or your worried about how the current or future economic climate may effect you, it is important to review your finances now BEFORE your available options disappear.

In contrast, decreasing interest rates combined with tougher economic conditions, presents new and exciting property opportunities. These opportunities are only going to continue however lenders are literally changing their products and policies on a daily basis. This may make it harder to get approved for finance down the track.

So how does one navigate this confusing and somewhat confronting landscape?

Having a system and a plan for building or maintaining your property portfolio starts to make more sense once you understand that there are different income servicing limits and lending limits imposed by lenders. To make sense of this somewhat complex lending system I have developed the ‘4 Levels of Finance’ to illustrate how you can use different finance options strategically and to your advantage, right now.

The 4 Levels of Finance include Full Document Loans; Low Document Loans; No Document Loans and finally the Ultimate Document Loan. As the number of properties you own increases you need to start getting more strategic with your finance strategy if you want to continually purchase property or access available equity in your property.

So let’s have a look at how you might use these loan types strategically.

Level 1: Full Document Loans

With full document loans your verifiable income (payslips, group certificates, tax returns, letter of employment) is used to confirm that you can service the debt and how much you can borrow. Lenders will also take into consideration rental income, share dividends or any other income that can be verifiable.

Of the 4 Levels of Finance, full document loans are the cheapest and it’s at this level that you will find the highest LVRs, most competitive interest rates, largest interest rate discounts and the lowest fees. Lenders love full document loans because this kind of finance poses the lowest form of risk.

For investors who can verify their income the initial strategy is to use full document loans until your income can no longer service additional debt (according to the lender). Once you have maximised your potential under full document loans you will need to move onto Level 2: Low Document Loans.

Level 2: Low Document Loans

Low Document loans can be used by self-employed, professional investors, PAYG and contractors who either can’t access the paperwork required for a traditional loan, who don’t want to provide all the paperwork of a traditional loan, or cannot verify their income.

With a low doc loan, instead of providing income verification, you sign a declaration that states your annual income and CONFIRMS your ability to afford the loan. Thats right, you must be able to make the repayments on the loan. The worst thing you can possibly do is take out a loan you cannot afford. You must also note that the tax office is starting to review low document declarations to check if it matches the income declared on tax returns. So you will need to make a note of this should the ATO come knocking.

There are many ways that a low document loan can assist you as an investor. Firstly as your property portfolio increases you become more reliant on your rental income - full document lenders do not always handle large rental incomes to the investors advantage. In addition, you may be receiving income from a source that cannot be clearly verified or accepted for full document approval, eg irregular commissions, lump sums, contractor income etc. Alternatively your Accountant may be minimising your taxable income and as a result your bank will not give you a full document loan. You may even be carrying forward loses or have a large increase or decrease in income compared to the year before. All of these reasons can make it difficult to be approved for a full document loan. The low doc loan allows you to get around these issues.

Whilst it may seem like you can keep borrowing forever with low document loans there are limits to how much you can borrow using this method.

The overall borrowing limits are generally defined by the lenders mortgage insurer. Most Low Document Loans with an LVR over 60% are insured by Lenders Mortgage Insurers (LMI). In fact you may have even started using LMI on your full document loans. Each mortgage insurer places limits on how much they will let you borrow (regardless of your income and assets). Once you reach the limit with that insurer – that’s it.

At present the two main insurers will lend up to $1 million at 80% LVR per property and have a maximum exposure to any one borrower of approximately $2.5 million (they may lump families together even if your borrowings are seperate). One of the main insurers will no longer approve low doc refinances, only purchases, thereby placing even greater restrictions on borrowers in the current market.

Moving forward you will need to use another insurer or a lender who self insures. Eventually you use up the lending limits with each insurer and this is when you move onto No Document Loans.

Level 3: No Document Loans

With No Document loans the lender will rely solely on the asset used as security, rather than a place a reliance on your income. You do not need to declare an income or complete an asset and liability schedule in most cases. Some No Doc lenders will require that you have ABN and GST registration. If you plan on getting to this level of finance – register your ABN and GST now to avoid frustrations later on (please speak to your Accountant first to determine any tax ramifications).

For people with very complex finance / company structures and substantial portfolios No Document loans have major advantages. They are particularly useful if you tend to purchase each individual property in separate companies / trusts as you won’t need to provide reams of paperwork.

No Document loans can be used particularly well by sophisticated investors. Here are some situations where a no document loan can be used to your advantage:

1. Are you buying off the plan? When the signed contract of sale is greater than 12 months old you can borrow on the valuation price rather than the contract price (in some instances). ‘Valuation over Contract’ can reduce the funds required at settlement where property prices have increased. This is a successful ‘no money down’ strategy that investors use in a market where property prices are increasing or where investors are sophisticated and buy at wholesale prices.
2. No mortgage insurance is required for no document loans and hence you will not have lending limitations placed upon you.
3. No Document loans can be used for a multitude of ‘unusual’ purposes such as short term loans; bridging finance; purchases which may not be ‘arms length’ i.e. purchase within a family at a discounted price; people who have short term ABNs; credit history issues.

The No Doc LVR will be lower than that of the other finance types (up to 80% - sometimes even 85%) and you will be faced with higher interest rates, fees and charges. However investors at this level will be looking at the profitability of the overall transaction and will be more sophisticated at identifying and negotiating better property deals and creating greater profits. At the end of the day, the fees and charges are simply a cost of doing business.

Level 4: Ultimate Document Loans

At this level, lenders look at the ‘deal’ itself rather than assessing your income, assets and liabilities. The Ultimate Doc is most commonly used for small or large developments. As it is impossible to prove serviceability on a personal level the lender will be looking at the potential profits and income derived from the development itself. The lender may require a certain number of ‘pre-sales’ before the development finance will be approved hence providing a level of certainty on the amount of debt that will left once the development is complete.

As you move through the 4 Levels of Finance you will find benefits and annoyances at every stage. The key is to have a plan.

In these changing economic times consider planning for any of the following:

1. Do you think a potential recession or poor economic times could negatively impact your current financial position (for instance, you are worried about losing your job)? If yes - you need to determine if a cash buffer set in place now will give you piece of mind moving forward.
2. Is your lender playing ‘fair’? Are they passing on the .8% discount? If no, you need to start assessing what other lenders will offer you.
3. Do you want to be in a position to take up new property opportunities should they come about? If yes, you need to look at obtaining equity now - not later. Lenders continue to pull products off the market and change their lending policy.

Complete our Fast Loan Enquiry Form Today and Loans Australia will assist you through any of these issues.

Plan for success,

Stephen McClatchie

Founder and Director
Loans Australia

P.S.

When I create a lending structure for clients I am not simply thinking about the current purchase/refinance but also future purchasing / refinancing requirements. It’s the ony way to ensure a client can continue to move forward on their terms - rather than the lenders.

If you have a proprety financing need that we can assist you with right now, give us a call on 1300 855 430 or contact us and I’ll personally make sure you get the help you need.