23 Apr Getting your finances sorted – Andrew Crossley
Getting your finances right should be the first thing to do when you want to buy a property but unfortunately, for many, it’s the last thing they do. We tell you about a book that will help get this part of it right. We speak with the author Andrew Crossley.
Kevin: One of the key things you have to do when you’re looking at investing in property is certainly securing your finances. A book I want to tell you about now that’s well worth picking up and reading through before you go down that path. It’s called Property Finance Made Simple, and when you read the book, you’ll see well that’s exactly what it does. It’s written by Andrew Crossley, who is my guest.
Andrew, thank you very much for your time.
Andrew: Thank you for having me.
Kevin: Andrew, why did you write this? And tell me about your qualifications to speak on this.
Andrew: I wrote it because I wanted to help as many people as possible who needed finance to understand how better to get a loan. My first book was more for property investors, and so this time round, I wanted to help upsizers and downsizers and really first-home buyers as well as investors understand how better to improve their chances to get a loan.
Kevin: One of the things I love about the book, in reading through it quickly, was that you did focus right upfront on housing affordability, which is probably one of the most spoken about terms right now around Australia. Just how affordable is property?
Andrew: If you look at the national level of things, it is affordable. If you look at purely Sydney, one could say it’s not affordable. Often, too many people are loosely saying there’s an affordability crisis, but using Sydney as a benchmark for the country, which I do think is incorrect. There are many suburbs around Melbourne within 20K… In fact, there are probably 16 suburbs within 20K of Melbourne that are under $600,000.
Kevin: Just talking about affordability for a moment, there are some alarming reports out in recent times about how many people are probably going to default because interest rates might increase. How do the financiers go about assessing someone’s risk in this area, and what should consumers be doing to make sure that they don’t fall foul of this?
Andrew: It’s a really good question. Every lender when they take on new debt or give someone a loan, they assess it at a qualifying rate. Normally it is about 7.2% to 8%. So if current rates are 4%, 4.5%, they’ve already determined the borrower can afford the loan if the rates went up to 7.2%.
Of course, the reality could be quite different in a household where someone perhaps could have been a bit liberal with disclosing their living expenses and they may find it tough if rates rise, but lenders have certainly tried to do their job with being compliant in ensuring that if rates do go up at least to 7%, that the person can still afford that debt.
Kevin: I think there’s a great need here for a lot more education for consumers too to understand that the banks believe it’s important to build the buffer in. While they might do that, they need to explain, I think, to consumers that “Hang on, we have built a buffer in here. We want to make sure that you can afford it at the current rate.” But a lot of consumers go away and think “Oh, this is pretty easy,” then they may over-commit and get up to that level, and then of course, once interest rates do go up, they’re going to be in a lot of strife.
Andrew: In fact, I’m concerned that over the coming year, there would be a considerable number of people who have over-invested or are over-exposed to the future cost of debt, and when rates do rise, and let’s say their loans do convert from interest-only if that’s what they’ve done to principal and interest, that will, in fact, potentially lead to a large correction in prices if there are a lot of forced sales.
I don’t necessarily think there’s a bubble from property itself, but one could conceive that a bubble effect could occur if there are a lot of repossessions or forced sales.
Kevin: Yes. What should someone do if they’re in a position where they find that they are headed down that path, Andrew? What would be your advice for them?
Andrew: I think it’s very important to understand their outgoing expenses. A lot of people hate the word “budget” and they don’t really have one. Some do, and the more who do, the better. Personal loan debt, that’s costing a lot more than a mortgage would – 6% to 9%, up to 20% for credit cards, versus 4.5% or 5%. So if they are able to, perhaps look to engage the services of a mortgage broker to determine which lender would suit their circumstances best and look to try to consolidate their exposure to other debts other than their mortgages.
Kevin: In chapter seven of your book, you deal with structuring your finance, and I like in particular the part where you deal with how to improve the chances of borrowing money. What can someone do to improve how they look to the bank or the lender?
Andrew: Avoid shopping around. If you keep going into the big four banks’ branches to inquire about what you can borrow, you could risk incurring more and more credit hits on your credit file. The more hits you have, it starts to look like you’re a debt shopper, and lenders don’t like that, and then you’ll be relegated to a much higher rate through a second or third tier lender, perhaps. So it is much better to engage the services of a mortgage broker to find the better borrowing capacity calculators out there and the most suitable loans for your circumstances.
You asked earlier my qualifications. Besides the three masters degrees I have and being in the industry for 20 yeas, I specialize in helping brokers structure finance for their clients to better suit their clients’ needs.
Kevin: Can I just ask you, you mentioned there about budgeting and how we don’t like to budget. I don’t know whether that’s an Australian thing or whether it’s just people in general. As Australians, how are we as savers?
Andrew: I think people are pretty good at saving money overall. I think the problem is not so much widespread to the greater community, this risk of being over-exposed to debt. It’s more the case that the people who have over-invested in the last four or five years by buying perhaps too many properties too quickly, thinking that time is running out, prices are going up, they had better act fast. Rates are very low and they forget that over the last 20 years, rates have averaged to 7%.
So the majority of people, if they’re managing their credit card debt, they’re not getting too carried away with buying too many properties too quickly, they should be okay. The problem is if people keep spending as if rates are low and they don’t have a budget to really understand what their outgoings are as a household. This is where things start running away from them.
Kevin: Andrew, we’re out of time, unfortunately, but thank you very much. Congratulations on the book. It’s called Property Finance Made Simple. The website to get it is PropertyFinanceMadeSimple.net.au. My guest has been the author Andrew Crossley.
Andrew, thank you for your time.
Andrew: Thank you for having me.