27 Jul The best ways to bleed the banks dry – Michael Yardney
Recently there’s been a lot of talk about banks changing the goal posts making it harder for property investors to get loans so in today’s show Michael Yardney details the 7 ways to bleed the banks dry.
Kevin: There is a lot of talk about macro-prudential controls and ways that the banks are going to make it more difficult for property investors to get their loans. Is this all that new, and what are the ways that you can actually overcome this and protect yourself a little bit more?
Michael Yardney joins me. Michael, I know you’ve been investing for decades. Is this all that new?
Michael: “Investing for decades” – that makes me sound old, Kevin. The rules are changing all the time with lenders, but that has always been the case. I remember the old days of credit squeezes where the Reserve Bank was able to restrict bank lending, so it’s now new, Kevin. You just have to make yourself attractive to the banks.
Kevin: How do you go about doing that, Michael?
Michael: It all has to do with serviceability. That’s the term that they use to protect themselves from taking on what they see as risky loans. Fortunately, not all lenders use the same criteria to determine your serviceability – how well you can service the loan – and that can make a really big difference.
I know some lenders will lend up to $100,000 more than others to the same person just based on how they take into account their income, their credit cards, and their job. I think it’s important to shop around to different lenders, but you have to do it in the right way. That’s why I think having a good finance strategist on your side is a good way to start.
Kevin: So it has nothing to do with how you dress and how you talk, Michael?
Michael: It used to be in the old days. I remember I used to have to put a suit on, go make an appointment, sit with the bank manager, and impress them. You also used to have to have a savings record. Remember those little savings books that you had before? The rules have changed now, so you just have to play with the current rules, Kevin.
Kevin: What are some of the things we should be aware of to make our profile better with the bank?
Michael: They check your credit record before they make any decisions. One of the things they look at is what your income is and what your expenses are, but they also have a look at how many credit cards you have, have you defaulted on your credit cards, because they actually see the potential for you to max out your cards even if you’re well disciplined.
My suggestion would be look at your credit cards, and maybe get rid of one or two – if you don’t need them – prior to applying for a loan. If your balance is zero, they still see that you could potentially use up those balances.
Kevin: Yes, you have access to those funds. I guess in doing that sort of homework too, making sure that your records look good when you take them in, like you know what you’re doing.
Michael: You should because banks require you to give proof of your income. If you’re self-employed, they request that in different ways. Often, it’s more than just a couple of pay slips. Having all that paperwork under control makes you a better investor any way, but it also makes you look as a better investor to the banks.
Kevin: When you’re putting all that together, Michael, is it as simple as money coming in is simply income?
Michael: You would think that, wouldn’t you, Kevin? But some banks take into account 100% of your rental income. Some only take 80%, and some less. Some see dividends, second jobs, child maintenance, company bonuses, commissions, government benefits, and annuities all differently.
That is, again, the reason why you have to have somebody who understands the rules of the game to take you through the maze. That’s where an experienced finance broker can really be immensely helpful.
Kevin: Michael, you mentioned earlier about credit cards. I guess included in that would be lines of credit. Is it important to have an understanding of those and try to get rid of them if possible or reduce them?
Michael: I think that’s a good idea. One of the ways you can sometimes do that is even roll them up into your home mortgage and pay them at a lower interest rate. You may have a couple of store cards that you’re now paying 18% or 19% on, and that way, you actually can maybe only end up paying 4.5% or 5% with your mortgage.
The real trap, though, is if you do roll up your debts into one lower interest rate one, you have to pay them off quickly, make sure that you get rid of them, not pay them for the next 30 years of the length of your mortgage.
Kevin: Indeed, mate. You mentioned there about working with brokers. That’s all a part of looking around for those discounts, but it’s also difficult to know how to compare them, Michael.
Michael: It is, and I wouldn’t just choose a bank based on the discounts they give you this month, the fees, or the interest rates. There is a lot more to it, and a good broker would also look at the flexibility of the loan. I think everyone needs one loan with all the services with an offset account and credit cards. But once you get into your second, third and fourth investment property, sometimes the loans don’t require all those bells and whistles. You can go to a smaller secondary lender who is going to maybe have a better package for you.
Kevin: Some of the other issues, just to round it out, Michael?
Michael: One of the things that you could consider is taking on loans for longer terms if you can’t afford the serviceability. Kevin, do you know that there are some banks that still give 40-year terms?
Kevin: Goodness, they wouldn’t do it for me.
Michael: Maybe not for you and me because they’re not figuring we’re going to be around for a long time. The concept is, though, that if you take a $300,000 loan over 30 years or if you take it over 40 years, what is going to happen is your interest payments are less, your monthly payments are less, and it makes it more serviceable.
The trouble is that you’re paying it for longer, so over the term of the loan, you’re going to be paying back much more. But it’s a good way to get in, and then consider refinancing it down the track.
Kevin: It goes back to that first point that you made about serviceability, doesn’t it?
Michael: It all has to do with how the banks see serviceability. Maybe a final point is that while they are all very different, sometimes the banks are on your side, and sometimes the right thing to do is nothing.
If you haven’t got the serviceability, don’t get yourself into trouble by taking on a commitment now considering that down the track somewhere interest rates are going to go up and you may have difficulty sticking to your commitment.
Kevin: Wonderful stuff. Thanks again for your time. Michael Yardney from Metropole Property Strategists. Michael, your blog if we want to catch up on more?
Kevin: Always good talking to you, mate. Michael Yardney from Metropole Property Strategists. Don’t forget they have offices all around Australia, and you can contact them through their website, as well, Metropole.com.au.
Thanks for your time, mate.
Michael: My pleasure, Kevin.