I have been exceptionally lucky to have met and interacted with some incredible people this year, and one of them has kindly offered to write two guest posts for mypropertyjourney.com. The premise of these guest posts is to look at my current financial situation from a lending perspective (the content of this blog post) and also my ability to purchase property and grow my portfolio in the future (the second blog post).
To give you a quick background on how this came to be: Otto Dargan, General Manager and Marketing Manager of Home Loan Experts, got in touch with me a couple of weeks ago and proposed writing two blog posts in an effort to look at my financial situation from a different perspective than those who provided advice in the article written by Penny Pryor earlier in the year. Naturally, being the curious and opportunistic person that I am, I agreed. I was asked to provide a detailed description of my financial position, most of which was disclosed in the article earlier in the year; however some additional information was provided as required.
A little about Otto and Home Loan Experts:
Otto began his career as a mortgage broker in 2003 and is a revered and respected professional in the industry having won the Broker IQ Competition run by the mortgage industry publication, The Adviser in 2011.
Otto started his own company, Dargan Financial, in 2006 which would later become known as Home Loan Experts in 2009 as the company began to realise the growing opportunity in the online brokerage market. It was obviously a wise decision as Home Loan Experts has been nominated as a finalist for the Australian Mortgage Awards in both 2010 and 2011 and achieved the Connective Volume Award in 2010 for achieving the milestone of $100,000,000 worth of mortgages in their loan book! Since winning the award, Home Loan Expert’s business has gone from strength to strength, more than doubling the mortgages in their loan book to date.
You can check out more about Otto and Home Loan Experts by visiting their website – http://www.homeloanexperts.com.au
Now, without further ado, here is the first of the two blog guest series by Otto Dargan. Enjoy!
What do the banks think?
If Emma is going to grow her portfolio rapidly then she’ll need to understand how the banks view her as a borrower.
The current financial climate is tough for investors; if they don’t meet the policy of the major lenders then their investing will grind to a halt. There simply aren’t many other options available as the smaller lenders are far less aggressive with their policy for investors than they were three years ago.
So how will the lenders view Emma’s next loan application?
Firstly Emma already owns a property with some equity in it and has a proven ability to save on her own. This gives lenders a lot of comfort, people who can save money even while renting are considered to be a very low risk. This is combined with her proven track record of repayments which shows she can manage her accounts & cashflow well.
Her asset position given her age & income is excellent, this tells the lender that she is able to spend less than she earns on an ongoing basis and has a buffer in the event of a something going wrong.
Her employment is stable, ongoing and in a professional career. From a bank’s point of view her income is very reliable and is likely to increase over time as her career progresses.
Although I didn’t view Emma’s credit file, it sounds like she has no defaults, judgements or history of bankruptcy and she has not applied for excessive unsecured debt such as credit cards and personal loans. These days the number & type of loans you have applied for recently are a big factor in your credit score.
Emma’s only major unsecured debt is a HELP (HECs) debt which is much higher than most property owners of her age. From a lending point of view a HELP debt is not considered to be a big problem as it is an investment in someone’s education, not money that is spent frivolously.
However the HELP debt greatly reduces Emma’s net income which in turn reduces her borrowing capacity by around $60,000. Some lenders have credit scoring systems that look at your net asset position after deducting any HELP debts, whereas others do not. So in some cases this can result in a low credit score with some lenders.
Part of Emma’s income is paid as bonuses, which are not always taken into account by the banks when assessing your ability to repay a loan. This is because bonus income is often irregular. Some banks can still accept it, depending on how frequently it is received and how long Emma has been receiving it for.
Emma recently moved to a new address, this is not a major concern unless she moves again in a short period of time. People who move addresses frequently are known to be a high risk and have a much lower credit score.
The current property that Emma owns is a one bedroom unit. I don’t know the exact size of the unit however if the property is under 50 m2 including balconies and car spaces then many banks will not accept it as security for a loan for more than 80% of the property value. This makes it harder for Emma to use the equity in her property as a deposit for future purchases.
Overall Emma should score very well with her next loan application and so should be eligible with most lenders.
The positives of her situation easily outweigh the negatives. If her next loan is at 95% of the property value (95% LVR) then it would be worth doing some research before applying as only the highest scoring applications are approved for 95% investment loans.
You can find out more about how credit scoring works using our credit score calculator.
Overall Emma is a low risk borrower and the banks are unlikely to have problems with her personal situation. However Emma could come unstuck if her property is too far under 50 m2 and if she can’t release more equity from it as a result.
Ultimately deposit size and borrowing capacity are going to be the two biggest road blocks for Emma’s investing. Paying off the HELP debt will increase her ability to borrow however this will only have an effect when it is paid off completely as the payments are the same no matter the amount owed.
So it is better for Emma to buy more investments first, and then when she runs out of borrowing capacity she can then work on paying off her HELP debt to increase her borrowing power.