How to avoid that the bank decides to cut you off and declines your loan application? Know how to get a loan approval, split mortgages in fixed and floating loans and use interest rate changes up and down for your benefits
Tips for Supporting Your Loan Application
Investor’s & Landlord’s Blog
Investor’s & Landlord’s Luck and Failure
No finance - No business
Looking for finance, what are the options? Loan money from banks, non-bank lenders or from private lenders. Investigate your options. Over previous years I used all three options at the time when only one options was left. In one case the bank withdrew their loan approval after I went unconditional on a purchase agreement. Well, I had to settle but no money—if so you will feel the heat!
The costs of non-bank or private lenders are usually above market interests. However when executing a plan A or B after time, everything is manageable. You need to work out option A or option B. In this example I could re-finance the investment nine months later and everything came right.
Keep in mind, what ever the difficulty is—it can be resolved if you have options. The last thing you need is that the bank decides to cut you off and declines your loan application. So, do your financial planning for obtaining a loan approval.
Home loan application—do your homework
When approaching the bank and you already have a higher volume of lending, you normally have an account or business manager. Keep in touch and become a trusted person. That is not always easy as bank staff change roles. At my banks it happens so after 2-3 years. Don’t expect that banks are your friend, making profit on you is their business. There is no room for your account manager to make it easy for you.
To go through the loan application process you can increase your chances to get your loan application approved. How?
· Visit your bank’s website and look at their current loan products and rates.
· Figure out how much money you exactly need and what your re-pay ability (serviceability) is. I made on the previous page already few comments regarding your disposable income.
· Know exactly what you own, how much equity (or assets) and the amount of deposit you are able to pay
· You need to have a finance plan as banks tend to combine security for multiple properties across an investment portfolio. Read more under “tips to plan and meet your financial goals” further down.
· Be aware that banks are very particular when it comes to paperwork, history of debts and repayments. Be prepared to prove your points.
Paperwork—What to include?
When buying a property the entity which signs the sale and purchase agreement normally borrows the money. It can be you, people in partnership, a company, or trust and in any case you, the shareholder, director, or trustee will be requested to sign the loan papers as guarantor. The bank will get you in one way or the other.
The complexity of paperwork depends on the borrowing entity and might include tax returns, financial year reports, proof of cash-flow, your partner’s income statement, etc. Ask your bank before launching the application what papers they require.
If you apply for a loan to purchase an investment property you will need estimates about the expected return on investment (ROI) and rent appraisal (rental income). I do prepare a business case with photographs, investment plan and loss/profit analysis for each loan application. That makes a good impression and for the credit department it is easier to apply their lending rules.
Tips—What to avoid in a mortgage application?
· Bad credit history
· High Credit Card limits and outstanding repayments
· Negative cash-flow from other investments
· Unsteady income, contract work or self-employment
· No savings for rainy days, or second income from husband or wife
Tips for planning to meet financial goals
Finance products are designed by the bank to make profit and compete on the capital market. Your financial future depends on those finance products, too. That is why you have to look at the specific of each and how you can benefit from in accordance with your financial goals:
Reduce finance costs—In general the longer the duration of a loan, the more you pay on interests over time. You would not choose a 30-years loan if you can afford to repay the amount within 20 years or less.
For business reasons you might want to maximize the cash-flow. The longer the loan term, the smaller your monthly repayments will be. You may consider “interest only” loans to maximise cash-flow. Some investors are wary, believing debts don’t shrink. If you invest in the capital gain and high growth property, nothing could be farther from the truth.
Split loans for risk management reasons—in fixed and floating to control affordable payments. For instance in a good financial year or windfall you will be able to pay a lump-sum to reduce debts without paying penalty fees.
Take advantage of changing interest rates—if you split loans then you are able to take advantage of different interest rates going up or down. Floating loans offer good adaptation for repayments, fixed rates might have lower interests.
Use equity on one property to buy another - banks prefer such cross security over different properties. That can cause problems when you sell one house from the cross security pool. The bank could require to increase the deposit to meet their changed LVR rules. When selling the bank might claim fees for early repayment, and/or break fees.
Loan contracts are not always easy to manage. Discuss your plans with your broker/bank before making any decisions. I hope that gives you lots to think about. Good luck.
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Klauster Blogs lead to a real person who worked as computer network architect for many years in different countries until retiring from IT and mastering a life as property investor and landlord.
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