And the keys to attaining finance in 2020
Without a doubt 2019 has been an interesting period in the finance industry for bankers, mortgage brokers and financial advisors. The fallout from the Royal Commission into the banking and finance sector has, unsurprisingly, led to more “red tape” and stricter lending parameters.
The aim of this has been to redefine their offering and the business sectors that they wish to lend to. This has been a minefield for brokers to navigate as, often, policy was being made up on the go, creating an unpleasant experience for both customers and brokers caught in the line of fire.
So, where does that leave potential borrowers?
Obtaining approval for a loan in 2020 will mean increasing pressure on your financial prowess, as the emphasis from banks on financial behavior, including debt repayment and expenditure, has increased.
If you ever felt that big brother was watching your every move, loans will be even more highly scrutinised from an income and expenditure perspective ensuring clients are not “worse off” by any loan approved and that they can comfortably afford the loan.
A big issue for lenders is loan defaults and the key to that is affordability. Assessment rates are what banks use to formulate affordability. Up until a few months ago, these rates were basically double what was advertised. A variable borrowing rate of 3.5% was assessed in terms of affordability at a rate of 7%.
In many cases this meant that the new loans were unaffordable on paper, even though once established would save the customer a significant amount of money and stress on their home finances. This assessment rate, thankfully, has been significantly reduced, in effect making it easier to obtain a loan.
So how do you get the edge over the banks?
The key to beating the banks at their own game is simple in terms of strategy but can be difficult in execution. Here are some key points to consider.
Key 1: Prepare for the loan – Maintain good spending habits
All loans, regardless of nature, require a minimum of 6 months of loan statements and 3 months income and expenditures from your bank account statements to verify your financial position. This assists the bank to ascertain any potential future payment default issues. The banks will use this recent history in your loan application so be mindful of your spending habits as you prepare to apply for a loan.
A great way to establish this affordability is to have a home budget that tracks your expenditure and helps to minimise unnecessary spending.
Key 2: Have some cash saving
In today’s real estate market, obtaining the recommended 20% loan deposit often requires a deposit of $100,000 to $200,000. For many people this may not be achievable. Some lenders will provide loans of close to 100% of the finance required, however higher interest rates, higher fees and Lenders Mortgage Insurance are likely to be incurred for this scenario. This will materially increase your repayments over the loan term. For this reason it is important to have some savings to contribute to your purchase as this will dramatically impact your financial position over time.
Key 3: Loan structure
Understand what your goals are for the next 5 years as this may influence the structure or setup of the loan, in terms of variable, fixed or split loans. Fixed rates can often trap you, holding back progress, depending on your situation.
Also it is important to understand other aspects of the loan, such as offset accounts, redraw facilities, and loans with low ongoing fees (annual and monthly fees). Another thing to consider is that low interest rates may not always save you money. Borrowers also need to understand the numbers. Sometimes the lower the interest rate, the higher the ongoing fees, particularly for loans financed through many car dealers.
Understanding this can save you thousands of dollars over the term of the loan.
Key 4: Ensure you are on your best behaviour
Another essential aspect to consider is to ensure that you don’t default on any loan, credit card or borrowing facility payment. Defaults or too many credit enquiries (such as those created when applying for any credit finance) are red flags, so it is important not to default on any loan repayments within the 6 months leading up to your loan application.
If you would like to discuss your finance needs, contact the team at Oracle Lending Specialists for advice that will suit you needs now and into the future.