serviceability

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From: Sarah Verrone


Hi everyone,
I'm having a little trouble understanding ways to arrange my finance so I can access
the equity in my properties(only 3,so far).
My bank insists that their first consideration is to see if I can service
any loan I'm applying for.I have a line of credit and because my equity has increased considerably in the last 6 months I thought
the bank would allow a revaluation in view
of extending my line of credit.No go...
they say I have reached my limit of how much they will lend due to my service ability.
I understand that this consumer credit code is a hindrance for me personally.
Peter Spann is BIG on encouraging us to use
our equity but it seems equity doesn't have the pull it once had.
Any thoughts on how I might find a more sympathetic bank or perhaps structure loans
to my advantage for equity access.
Thanking you,Sarah
 
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Sim

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Reply: 1
From: Sim' Hampel


There are two major factors that affect a bank's willingness to lend you money.

The first is LVR, or Loan to Value ratio - a percentage figure you get by dividing the total amounts of all your loans by the total value of all your properties.

Once you get above a certain percentage, lenders generally consider you to be too much of an exposure to them (ie. they stand to lose too much if you default and they have to sell up). Using a variety of lenders can help, but only to a point.

The other factor is servicability. This is a mystical figure based on the entrails of a goat, or chicken, depending on which institution you talk to. Seriously though, each lender has their own formula for calculating servicability (enlist the help of an independant mortgage broker for more information here).

This formula is simply a means of determining how much income you have available to service your debts. They look at how much you (and your partner perhaps) earn from salary and wages, and how much you get in rent from your properties.

Now the confusing thing is that they generally not consider 100% of your salary as being "available" for servicing debt... you do have to eat sometimes. The actual figure they use depends on the lender.

What's more, not all lenders will consider 100% of rental income, even though you generally don't spend this money on food and living expenses. In fact, some lenders will only count a rather small percentage of this figure using excuses such as allowing for unforseen expenses, interest rate rises, vacancy and so on.

Once you have too much borrowing, even if you are quite comfortably managing the repayments on rental income, the lender may come out with the excuse that you are "too rent reliant" and refuse to lend you any more money. Even though you've bough a house in the most fantastic location, and you're tenants have made it their "home" and never look like wanting to move out, the bank still considers that this income is too risky compared to your large salary (which of course you may lose in an instant due to redundancy or illness or whatever). Go figure. But we have to deal with it.

So what do we do ?

Pretty much, find the lenders that are the most open minded and flexible with their assessments. Who are these lenders ? Well... you can go out and learn through trial-and-error, or you could try an independant mortgage broker (I suggest you do), who can explain how each of the lenders operate, and indeed some of them have these new fandangled things called computers which have some fancy software that lets you compare your servicability and liklihood of getting approval from a whole heap of lenders... really cool stuff.

 
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Reply: 1.1
From: Dale Gatherum-Goss


Hi

Yes, I've heard it said before that if you go bankrupt owing $100,ooo it is your problem, but, if you go down the tube owing a $1m+ it is the bank's problem. That's why they get funny when the exposure increases.

Have fun

Dale
 
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Reply: 2
From: Rolf Latham


Hi Sarah

If you are using the borrowed $ for investment then "consumer credit" code is not the baddy.

The code only applies to borrowings used mainly for a private nature. Common cop out used by the banks to politely say "no thank you, at this level you are not worth the risk
"
I had to laugh at Sim's reply in regard to the entrails of animals, but its quite funny that sometimes even the lending institutions themsleves do not follow their own rules.

Yes this loan should go through, but ooh hang on, is that a Daihatsu Charade that you drive, or Daihatsu Feroza, some service models are that finnicky if you are close to the line.

A good business proposition and /or restructure of your existing liabilites can also help you get loans through. Lenders will bend but not break the rules. If your's won't play, there are others that cheerfully will.

Ta

Rolf
 
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Reply: 1.1.1
From: Rolf Latham


Hi Dale

How do you come up with such sayings that early on a Saturday morning. You must have some less than two year olds ?

Ta

Rolf
 
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Reply: 2.1
From: James Doherty


My advice, choose a broker that shows some financial intelligence, it all depends on the individual and their contacts. The good ones will keep going for you. I've ha the same rubbish from banks, even took 3 goes to get our latest loan. Not good for the credit rating but i have the property now.
Regards,
JAD
 
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Reply: 1.2
From: Sarah Verrone


Thanks Sim,
Can't say from my past experience mortgage brokers have been helpful.
The last guy was incredibly hopeless.All
the time spent faxing info and chasing him was a total waste.I got more money myself with my own bank.
I find by the time I explain to the broker my financial situation and give all the details might as well go to the source myself.
I know there are good ones out there but it takes too much time to find them.
I guess the idea is to keep trying different lenders.cheers Sarah
 
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Reply: 2.2
From: Sarah Verrone


Thanks Rolf,
The penny just dropped the other day from what someone else said re credit code and
applying for an investment loan.You have now confirmed this.
My bank manager keeps harping back to it in my particular case.Sounds like she's digging
for excuses.
In a nut shell what is this credit code?
Something else(besides manager)I'm finding that is getting in my way. Manager has to qualify any investment loan at a higher interest rate than the rate I'm applying for,even if it's a fixed rate.
She has also taken my existing loans and assessed them on this benchmark rate despite the fact they are fixed rates?

Can you get a line of credit on an interest only/fixed loan?Would this have to be set up
from the start of the loan?
cheers Sarah
 
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Reply: 2.2.1
From: Rolf Latham


Hi Sarah

I have reason to believe your lender is possibly the dragon.

The Uniform Consumer Credit Code is a uniform (from state to state) set of rules introduced some four years ago to make credit fairer and easier to understand.

Under the UCCC if you are aplying for a loan that is predominantly for "private" use rather than investment use, the lender must be sure that you can service your loan. If you default on your loan and it can be shown the lender gave the loan without resonable investigation that you could pay it back, the courts can (and have) order the bank to pay full restitution.

Some lenders treat Investment Loansas under the UCCC as well, just to keep things consistent.

Assessing the loan at rate higher then the current rate is common amongst most lenders, although there are some major differences in the level of "insurance". The lender does this to "ensure" you can still pay the loan back. While you may have a three or five year fixed rate, at some time this will mature and may come onto a higher market.

Most LOCs are interest only loans by default. In many cases, you would have to break the loan to convert to an interest only loan from a P&I, but ask your lender. With > 1000 loan products out there you can find what you are after.

Ta

Rolf
 
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Sim

Administrator
Reply: 1.2.1
From: Sim' Hampel


Sarah,

When dealing with almost any type of professional or advisor, I prefer to work solely from recommendation. I ask people whose judgement I trust to recommend someone that they have had numerous dealings with and ask them to refer me.

 
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