This is one of those decisions that need to be made on logic, not emotion so if you assessed yourself as low-rational/high-emotional in Session 1.3 take note! Don’t get sentimental about banks. Don’t feel you have to be loyal to a bank, even (or especially) if it’s one of the Big Four, it sponsors your favorite sporting event, it already holds your account or home loan, and the staff is friendly at your local branch.
Using a muscle-building analogy, if finance corresponds to the carbohydrates that fuel your exercise, the lender is merely the brand of cereal or bread you choose to provide those carbohydrates. If you don’t like the flavor of one, switch to another. Fortunately, competition is constantly increasing both from within and outside the banking sector so you should be able to find a lender willing to accommodate you if you shop around. We have already mentioned many of the criteria you should be seeking. Use the following checklist.
❑ The lender understands that you require flexibility in structuring your finances to build wealth, and is prepared to negotiate.
❑ The lender is prepared to disclose its valuation of the property used to assess the loan.
❑ The lender’s valuation is based on a ‘comparable sales’ method and is as close as possible to true market value.
❑ The lender is prepared to revisit the property valuation regularly throughout the term of the loan, to ensure that maximum equity can be raised for further investment.
❑ The lender allows you the highest possible borrowing capacity (high LVR, high DSR), being prepared to advance up to 90 percent of the property’s purchase price or valuation (whichever is lower) without taking collateral security over another property or the family home (i.e. no cross-collateralization).
❑ The lender accepts at least 80 percent of the projected rental income from the investment property in your income for credit assessment, plus any tax savings you will make from negative gearing.
❑ The lender is at least up-front about (and preferably minimizes) additional fees such as loan application fees, valuation fees, penalties for paying out early (including refinancing), administration charges and so on.
❑ The lender is prepared to offer you lengthy interest-only periods, to maximize the value of your tax deductions (some will offer 10 years or more).
❑ The lender should not be the same as the one with whom the family home is financed, in order to avoid indirect ‘all monies’ clauses.
When we say ‘lenders’
The Big Four banks in Australia don’t generally stack up very well against that criteria. Loans are available from some of the major insurance companies and credit unions, or through mortgage brokers (for a fee), but it is likely to be the second-tier banks that are initially most useful to you. Shop around. It may be worth paying an extra 0.25–0.5 percent in interest rates, and even fees and charges, to find a lender who will be prepared to support you in seizing opportunities flexibly when they arise and in using your equity to maximize your investments over time. State your intentions, ask questions and be prepared to negotiate.
Using a broker
There are some advantages in using a finance broker to shop around for a deal for you, at least when you’re starting out. If you go to major brokers, they can often get you a better deal with your own bank than you could get by going direct to your bank manager. (Sad, isn’t it?) Some of these brokers are doing $100–200 million worth of financing per month – and the banks are happy to pay them commissions and trail fees (a percentage of your interest for the life of the loan) in order to secure the business. Test out brokers by getting them to offer you financing through a couple of banks on the terms and conditions you want.
Questions for prospective lenders
1. What is the LVR that you will lend on the particular property I am interested in?
2. How do you calculate debt service ratio and what is the highest debt service ratio you will allow?
3. What percentage of the rental income from an investment property do you take into account in calculating debt service ratio?
4. What cost do you put on dependants in calculating affordability?
5. Do you carry out a formal written valuation?
6. Can you disclose what are your instructions to your valuer?
7. Can you disclose the names of the panel valuers so that I can contact them to discuss the valuation?
8. Do you cross-collateralize your loans?
9. If I am using the equity in my own home to purchase an investment property, can I limit the exposure for my own home (i.e. not cross-collateralize)?
10. Do you require mortgage insurance on your loans? At what percentage LVR?
11. How long after taking out the loan can I provide an updated valuation for you to reassess the equity in the property?
>>> Coming Next: Applying For A Loan
Please note: This is an extract from the Success From Scratch – it may not contain the exercises from the full version of the book/audioset, for full version please contact us or follow our blog for more.