Over the past two years, I have highlighted how tight the credit (mortgage) market has become a couple of times. In the past, borrowing was simple. The bank would always offer you more than you wanted to borrow. You only had to provide a few documents and the money was yours!
Things have changed dramatically. These days, banks spend most of their time trying to look for reasons to decline a loan rather than approve it. It’s as if they don’t want the business! The onus is on the borrower to prove why they should approve the loan – you are guilty until proven innocent.
The other problem is that many bank employees are just too scared to use their discretion. As a result of closer scrutiny from the regulators and the Royal Commission, the banks significantly tightened credit policy. They also tightened their oversight of credit managers to the extent that they are now reluctant to move outside credit policy for fear being disciplined (e.g. loss of bonus or even job)! This creates perverse behaviour such as being highly pedantic, nonsensical and over-analysing due to fear of missing something.
In this new environment, borrowers are beggars, not choosers.
With this in mind I have listed 11 tactics you can employ to make you ‘loan ready’.
1. Start preparing 3 to 6 months out
My first tip is to start preparing for a loan application a minimum of 3 to 6 months in advance. Consider all the tactics I have listed below. If you need to take corrective action, you will have enough time to make any changes. Leaving things to the last minute might reduce the pool of lenders available to you.
2. Reduce discretionary spending three months out
The banks will not distinguish between discretionary and non-discretionary expenditure. They will trawl over your bank statements (3 months) to independently verify how much you spend each month and base the loan assessment on that number. Banks have asked questions about once-off transfers to family members, swimming lesson expenses, small charges by Uber Eats, ATM withdrawals at casinos, a Buck’s Night expense (!?) and so on. You would be flabbergasted by the detail they go into. They must spend hours looking at these things – inventing questions to ask! It is very pedantic and intrusive but unavoidable.
Therefore, to make it easier on yourself, minimise expenditure three months prior to lodging an application. Reduce as many discretionary expenses as possible. There are two benefits of doing this. Firstly, you will make the loan approval process a lot easier for yourself. Secondly, you might find it enlightening – allowing you to reset your spending habits.
If you have a high income, it might not be necessary to do this – consult with your mortgage broker (us) to ascertain how important this tactic is in your situation.
3. Control information flow
Having all your accounts with one bank probably makes things simpler and cleaner. However, it also means that bank knows everything about you. When lodging a mortgage application, banks will typically want to review your last 3 months of bank transaction statements (see item # 2 above). However, if you are an existing customer, it means the bank is able to see whatever history it wants. Keep this in mind.
If you want to control the information flow, then it’s wise to use a separate bank for your day-to-day transactions from the bank that holds your mortgages (or you plan to borrow from). Also refer to tip # 5 below.
4. Consider shifting loans onto different securities
Lenders borrowing capacities can vary a lot. One way to extend your borrowing capacity in this very tight credit market (assuming you have enough equity) is to move your loans onto one or two securities (properties). This may the free up a property that you can take to a new lender that has a much higher borrowing capacity.
Some lenders treat external debt (i.e. mortgages with other banks) differently to internal debt and this allows you to borrow more. Therefore, you can leave all your current borrowings with a lender that has a lower borrowing capacity and use a new lender with a higher borrowing capacity for your new loans.
The same applies if you dispose of a property. Instead of repaying and discharging the loan, move it onto a different security (property) and reduce the balance to say $100 – so that you can redraw the loan in the future if you want to.
5. Be careful with trust distributions
A discretionary family trust can be a good vehicle to assist with tax planning (minimisation) because it allows you to distribute income and capital gains to various beneficiaries at your discretion. This is particularly useful for self-employed persons. Such beneficiaries could include non-working parents and adult children. This helps spread the tax liability across multiple taxpayers. However, as a result of the tight credit environment, lenders are now disregarding some of this income – let me explain using an example.
Rick and Karen are self-employed and have a family trust that has $200,000 of income. They have two adult children at university that do not earn any taxable income. Therefore, Rick and Karen decide (as trustees) to distribute $50,000 of income to each family member. However, when Rick and Karen approach a bank for a loan, some banks will only include Rick and Karen’s distribution (not the adult children as they are not loan applicants). This is the case even though distributions are completely discretionary. Again, this approach is completely nonsensical.
Not all lenders will take this approach but many of the smaller lenders do. Therefore, you must be careful when dealing with distributions and/or selecting a lender.
6. Having a transaction account and/or credit card with other institutions
I have written about credit scoring and the introduction of positive credit data here and here in the past. Whether you are regarded as an “existing customer” or not has a big impact on your credit score (existing customers attract a lower credit score). You can be considered an existing customer if you have a bank account or credit card with a bank (both is better). Therefore, for borrowing capacity purposes, it is wise to have a ‘relationship’ with multiple institutions. This widens your options – as you can eventually borrow from more institutions that consider you to be an existing customer.
7. Consider changes in jobs or circumstances
Changing your employer may have an impact on your borrowing capacity. However, if your role and industry hasn’t changed (just your employer), then it’s less likely to be a concern. In any case, the bank will need a least one pay slip before it will unconditionally approve a loan. This has caused some stress for some clients recently in various situations i.e. they moved interstate or returned from maternity leave. We provided employment contracts, verbal employer checks, etc. – but the bank still wanted to see the pay slip (hence my comment about not moving outside of standard policy)! In the past, banks would typically give us a loan approval subject to us providing a pay slip before the loan is drawn – but not these days. So, if you are planning on changing your job, make sure it won’t negatively impact your borrowing capacity.
8. Make sure you have perfect conduct
It is important that you have perfect banking conduct. That is, all loan and credit cards are made on a timely basis. No late payments, accidental overdrawn accounts or any “administrative” issues.
We had a situation recently where the bank would approve a loan for our client but not the bridging finance component simply because a banking administrative issue – where a loan was attempting to take a repayment from an account that was closed, and the client made manual transfers instead. Unfortunately, sometimes those transfers were a day late! The problem was that a higher level of ‘credit’ had to approve the bridging finance component and their credit policy stated that the customer must have perfect loan conduct. The credit manager wasn’t willing to apply any common-sense in this situation and make an exception to policy. Approving the bridging finance wouldn’t have created any additional risk to the bank as the client has already unconditionally sold his previous home.
The lesson here is that seemingly inconsequential and administrative matters might come back to bite you. Therefore, pay extra attention to ensure all loans and credit cards are perfectly up to date.
9. Property valuations are coming in low
The number of properties being sold at the moment is 25% to 30% lower than it was 12 to 18 months ago. However, in Melbourne for example, $235 million of property transacted last weekend. At the peak of a boom market, over $1 billion of property could change hands in one weekend in Melbourne. This shows you how little property is selling at the moment – particularly higher value property.
This negatively impacts on bank valuations because:
- there are far fewer comparable transactions for a valuer to rely on forcing them to be more conservative with their estimates; and
- the people that have decided to sell property in this market have typically been motivated sellers i.e. they needed to sell for a particular reason. Given the choice, most people would elect to not sell in this market and instead wait for it to pick up. A motivated seller in a soft market is often forced to drop their price in order to secure a sale. This affects comparable sales data and hence valuations.
As such, it is commonplace for bank valuations to come in below client expectations. This must be considered when planning/estimating your borrowing capacity.
10. Make sure tax is up-to-date and low credit card balances
This is an obvious tip, but it is important that your taxation affairs are up to date (i.e. all tax is lodged and paid for). It is also best for any consumer debt, particular credits cards, to be as low as possible.
11. Be realistic: It takes a lot longer than it did a few years ago
The final tip is to have realistic expectations. A few years ago, there have been times when we could have a loan move from application to unconditionally approval within 24 hours. Today, it takes two to three weeks, on average – sometime longer. We need to provide more documents, answer more questions and do a lot more work. There is no such thing as an easy loan application anymore. So, make sure you are prepared for it to take a lot longer and to be asked more questions.
You need an experienced broker
I hope this blog hasn’t scared you too much. Arranging finance is not impossible, its just harder than it used to be. We are still able to successfully assist almost all of our clients. However, the landscape has changed, and these 11 tactics will help you.
Whilst I have a vested interest in saying this, I believe that now more than ever you need a savvy mortgage broker representing you. They can provide you with specific advice on what you need to do to become loan ready. And when it comes to lodging an application, they can insulate you from some of the challenges and frustrations caused by lenders at the moment. If you would like our help, please contact us here.
