25 Jul Get the banks wanting your business – Michael Yardney
With today’s low interest rates and cheap debt, many investors are finding themselves in a favourable cashflow position. But as the banks tighten their purse strings, investors need to think outside the square when it comes to gearing into further properties. So we give you eight strategies to make sure an invisible serviceability ceiling doesn’t stop you from growing your property portfolio. Michael Yardney helps with that advice.
Kevin: We’ve all heard that APRA’s restrictions have caused the banks to tighten the screws and make it even harder for many investors to get their new loan or refinance their existing loan. I did an interview that we ran on the show recently with Andrew Mirams from Intuitive Finance where he looked at the difference between serviceability and affordability.
Michael Yardney from Metropole Property Strategists joins me.
Michael, I’m just keen to know from you, what are the strategies you would suggest someone put in place to make themselves more attractive to the banks?
Michael: Kevin, I heard that interview with Andrew, and the issue was that there was somebody who’d written in who had strong cash flow, had a large amount of equity, but yet the banks despite today’s low interest rates weren’t prepared to lend him more.
And that’s happened, as you said, partly related to APRA’s restrictions. They measure your serviceability not on today’s prevailing interest rates of, say, 4.5% but can you repay the debt at 7.5% or 8% and principal and interest?
You’re right, Kevin. There are some tricks you can use to make your figures look better to the bank.
Kevin: What are they, Michael?
Michael: I think one of the first ones you should look at is your credit cards, because the banks take into account your credit limits. Even if you’ve never borrowed to the limit, they figure that you can go out and buy something expensive tomorrow.
If you have multiple credit cards, maybe you get rid of them and stick to one, and if you have a credit limit of $10,000 that you’ve never used that much, cut it back to a much lower amount and then all of a sudden, they will see your serviceability as higher, Kevin.
Kevin: That’s a great tip. What else, mate?
Michael: The other thing is consolidate your unsecured debts, because what they’re going to do is actually ask you to do a balance sheet of all your income, your assets, your outgoings, your liabilities, including other debts. Sometimes people have high-interest credit card facilities or other loans and it’s often good to try to consolidate them onto maybe a lower interest rate facility and make yourself more attractive to the banks.
Kevin: Another thing, too, Michael, I guess we think of ourselves as individuals but the bank really looks at us as a business. I guess we therefore have to act and put forward a business front when it comes to things like our paperwork.
Michael: Well, Kevin, if you can’t provide the last few pay slips, if you don’t have all the details of any bonuses that you’ve had, it makes it really hard to do an accurate serviceability picture. Therefore get all your paperwork in order. If you have a proficient finance broker, they’re going to make sure that you have that before they even submit your loan to the bank. It makes you look more effective and efficient, Kevin.
Kevin: Michael, what about shopping around? Are you raising your head then if you’re looking around at the different loan products and you make applications? Is that a bad thing?
Michael: That’s a bad thing by making applications, but you should definitely be shopping around and looking for the right loan product. But Kevin, that doesn’t mean the cheapest interest rate, because I’d rather have a bank that will lend me another $300,000 or $400,000 and spend another quarter of a percent interest to get that than to get the lowest interest rate and not be able to get another investment property.
That’s where a proficient mortgage broker will help you identify the loan products most suited to your needs with features that potentially work to increase your financial capacity. Different banks will look at your serviceability differently.
But no, don’t go to different banks and apply, because if you do, that shows up on your credit score and then they’ll wonder, “Hey, why are they doing that?”
Kevin: Yes. I remember when we started borrowing money to invest in property, albeit it was a principle place of residence, but the banks in those days didn’t take into account Carolyn’s wage or Carolyn’s income. That’s all changed, hasn’t it?
Michael: Very much so. If you’re going to be buying a property with your life partner, your spouse, a family member, if you can show that there are two people who are going to carry the burden of the serviceability, it suddenly increases your ability to get loans, Kevin.
Kevin: What about cross-collateralization?
Michael: Well, Kevin, we’ve spoken about that often in the past, and what we’ve said is in general, we’d like to avoid it. But sometimes it is unavoidable, and by offering additional security to the banks, it can occasionally allow you to borrow a higher LVR. So if it’s the last resort and that’s what you need to get into the market and take advantage of the opportunities, then yes, sometimes you just have to do that, Kevin.
Kevin: Do the banks like me taking loans over a longer period, Michael?
Michael: Kevin, often we think about 20- or 25-year loans, but there is a small group of lenders who let you borrow for up to 30 years, and I think there are one or two that offer even 40 years for the right candidate. Probably not for you or me, Kevin, at our age, but that extra 10 years saves hundreds off your monthly repayments.
Over the long term, of course, you’re paying a lot more because you’re paying interest for longer. But I wouldn’t be suggesting you keep that loan for 30 years. Maybe in three or four years’ time, you’d revisit it, you’d refinance it, you’d see how things are going on. But it’s definitely a way of making it more serviceable by actually having longer loan terms.
And, Kevin, there’s another one. There’s the concept of locking in on interest rates today. As I said a moment ago, the banks are looking at your serviceability based not on the current 4.5% or 5% interest rates but what if interest rates go up? If you lock in a portion of your interest rates – and I’d be suggesting you get good advice to see if that’s appropriate for you – then the banks can’t say, “Hey, you have to be able to service it at 7% or 8%.” It makes it more serviceable because a portion of your loan is already locked in as a rate that’s fixed for the next three to five years.
Kevin: Michael, this is all about making yourself look as attractive as you possibly can to the bank, isn’t it? Therefore showing that you’re a good saver, is that important?
Michael: There are two elements to that, Kevin. First of all, showing a good savings record makes you attractive. But the other is giving yourself more deposit, more equity to get going works.
I believe you should be spending less than you earn, saving that, and maybe if you’re starting off, putting it in an offset account against your home loan if you have one or into an interest bearing account if you don’t have any other loans that you can take advantage of – and get a good track record, a good savings record, but also it’s a great discipline moving forward as a property investor, Kevin.
Kevin: Michael, we’re out of time but great talking to you, as always. Thank you very much, and we’ll look forward to catching you again soon.
Michael Yardney has been my guest from Metropole Property Strategists. Thanks, Michael.
Michael: My pleasure, Kevin.