This week, we are looking at the changes in the past few months to lending, and what banks are looking for in borrowers when assessing a home loan application.

HERE’S WHAT YOU’LL LEARN FROM TODAY’S EPISODE:

• The C’s of Credit and applications;
• Having all your paperwork ready and evidence of income;
• Why going to a bank directly may not always make sense;
• Understanding the right lender or bank for the right applicant;
• Having choice; And
• Much More

LINKS OR ARTICLES WE MENTIONED:

• None

SPEAKERS IN TODAY’S EPISODE

Michelle May – Sydney Buyers Agent

Marcus Roberts – Mortgage Broker

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Please note that any views or opinions presented in this podcast are solely those of the speakers, and do not necessarily represent those of any business. These views and opinions are general in nature, and do not take account of your personal objectives, financial situation and needs. Please consider whether it applies in your circumstances and seek professional advice wherever appropriate.

Transcript

Michelle May:	Hey. Good afternoon and welcome to Sydney Property Insider with Michelle May, myself, and Marcus Roberts. Marcus, how are you?
Marcus Roberts:	Good. How are you, Michelle?
Michelle May:	Yeah, good. So, we’re onto episode six. My god, we’re getting old hands at this aren’t we?
Marcus Roberts:	I know, it goes quickly doesn’t it?
Michelle May:	So, this week I thought we’d discuss what banks are looking for in buyers, but before we do that, we just have our quick news review. So, looking at Saturday, the 3rd of Feb, the auction clearance was 57 percent according to Domain, but that’s still coming off quite a low base of only 178 auctions. And bear in mind that these are only the auctions that they had the cleared results for, so it’s not a full picture as yet, but 57 percent is, again, a bit lower than last week. I think we still have to wait until we get that real full swing of February, end of Feb …
Marcus Roberts:	Still have full market activities really come in and that we should already be holding out for that, so early March period, late February.
Michelle May:	I think so.
Marcus Roberts:	If all the campaigns are running.
Michelle May:	Yeah, I think so. The agents that I talked to and that I see at opens as well, is that I’m queuing to get into the property. So, there’s clearly buyer’s interest there. Whether they’re willing to put their hands in their pockets and actually purchase this year will remain to be seen, but interesting nevertheless, 57 percent in this week.
	So, going to banks, what are they looking for in buyers? Now, unless you’re incredibly cashed up or have won the lotto or sold bitcoin at its peak, most people use banks or lenders to finance their property purchase. Now, you could almost call them a necessary evil them, but, at some point, you most likely will apply or will have applied for mortgage. But what exactly is it that the banks are looking for and how can you provide a great case for your bank or mortgage broker to submit for approval?
	Now, you know a lot more than me about this subject, so Marcus, take it away.
Marcus Roberts:	That’s incredibly sad actually that I realized what my life has been like up until now because I have worked in bank credit and I’ve also been submitting approvals and submissions for loans for the past, I’d say, coming up to 15 years. And one of the things that we always talked about back in my banking days when I was looking at credit submissions was around really the four C’s of credit, which is slower, over time, expanded to the five C’s of credit.
	Now, even thought that was typically more for business and commercial loans, the same principles really apply to any time that the bank is offering credit. So, the first that I guess we could talk about and the biggest in a bank’s capacity is character. So, what is the borrower like?
	With business loans, it’s really easy. You meet with a borrower, you get a feel for them, you get a feel for their history, you get a feel for the business overall and what they’ve done in the past few years. But, for home loan borrowers, especially for banks that have got centralized credit processors that do this day in and day out, and they’re looking at many applications a day, not just the one, it really comes down to almost quantitative data. So, it’s much reliant on things like credit scores and repayment history.
	For a home loan, it’s has the borrower paid all prior debts on time? Do they have a good credit history? Do they have a good credit score? Are there any unusual activities that have appeared in the past few years? Is there a pattern of anything adverse? So, that could be think like missing [teleco] payments, that could be missing mortgage payments, bill payment failures, credit card overuse, things like that. So, is there anything in your credit history that you historically have missed time and time again [crosstalk].
Michelle May:	Red flag.
Marcus Roberts:	You know, red flags for banks. So, why should the bank give you, the borrower, money if you have no history of proving that you can pay it back?
Michelle May:	Of course.
Marcus Roberts:	So, other things that they might look at and they’ll certainly be looking for are have any formal debt arrangements been entered into, or has the applicant gone through bankruptcy in the past? Is there any history or is there any known history of anything else adverse there?
	None of these, we have to say, are a deal breaker. All it may mean is just looking at a different bank or a lender that have used these things in a quite different way. So, if you were the perfect applicant who is a all bills on time, you’ve never had a mortgage, you’ve never gone bankrupt, you’ve never entered into a formal debt arrangement, anything like that, then, yeah, absolutely most banks would love to have you as a customer.
	If, however, you have through, maybe no fault of your own, but if you have had mortgage [inaudible] or if you’ve had problems with credit in the past, there will be a bank that will still see you very favorably, it’s just about finding the right one for you. So, finding someone that’s a specialist in consumers or in applicants that have a less than 100 percent credit history.
Michelle May:	And there may be a different interest rate attached to that, right?
Marcus Roberts:	That’s right. Yeah, so, again, it really comes down to the risk for the bank. So, the banks offering you, as the applicant, a loan, and the bank wants to see a return on that loan.
Michelle May:	Sure.
Marcus Roberts:	Now, if you are of perfect credit history, then they’re going to offer you a very competitive rate at the best of market, but the lowest that they possibly can. If there’s any questions about whether you’ve made payments in the past or whether you’ve had a history of [inaudible], then what you may find is that you’re paying a slightly higher interest rate, which doesn’t mean that you’re paying that for 30 years. It just means that for the next couple of years, they just want to test you out and make sure that you’re good for the money, make sure that you’re good to repay the loan.
	And then, as the applicant, as the consumer, you should be paying all your obligations on time as possible. And as soon as you’ve got to a point where you’ve got two years or 18 months behind you, then go back to the bank or go to another bank if applicable to say, “Look, hey, I’ve made all my payments on time. Credit history is much cleaner than it was 18 months ago. I would really like a reduction in the rate that I’m paying.”
Michelle May:	Yeah, that’s very clear. Understood. So, what’s the second C?
Marcus Roberts:	So, second C comes down to capacity, so what is it that you can repay? And this is about inflows and outflows as well as what will happen if interest rates rise? Let’s talk about the inflows first. Your salary, your income, rental income, where is it that you as the applicant make your money? Where is the money coming in, the one that one day, or that each month, pay back the loan? So, rental income, are you generating rent from investment property? Salary, are you making a general salary from your primary occupation? Do you have pay slips if you’re a self-employed applicant, tax returns, thing like. Just proof that you are generating an income that can repay the loan.
	And that comes down to what goes out. So, we’ve talked about salary coming in, then your expenditure. Groceries, your food, your internet, your foxtail, or childcare, transport, mobile phones, all of these things that you pay on a month to month basis or yearly basis. What is it that you spend that keeps you going each month?
	Banks typically have a minimum amount that they apply each month for an applicant, so hypothetically, let’s say that that’s 1500 dollars a month. If you as the applicant go to the bank and say, “Okay, well I only spend 1200 dollars a month,” most banks would say, when we’ve done our research, they typical applicant has a minimum repayment of 1500, or a minimum expenditure of 1500, so we will apply 1500 dollars instead of the 1200.
	But, showing declared and really itemized expenditure on a month by month basis is really going to help because it allows the credit assessor to make a good judgment on what you’re spending month by month.
	Now, the last part of capacity is, it’s not just great to see that you can afford loans at today’s rates, especially when we’re seeing interest rates in the threes. It’s about what happens if interest rates move against you? So, if there’s rate rises over the coming 12 months, or over the coming 24 months, can you still afford the loan that you’re applying for today in 18 months? Because at the end of the day, banks are really there, they don’t want to see their customers default on their obligations. They want to see success stories, they want to make sure that they continue getting the interest payments they get to the loans they give out.
Michelle May:	So, typically, what interest rates would they take into consideration then?
Marcus Roberts:	So, many banks, not all banks, but many of them use something called an assessment rate. So, let’s say hypothetically that you could get a rate of four percent on the dot. And four percent on an owner occupied property, they might look at an assessment rate of seven percent to say, “Okay, let’s say that the IBA moves rates upwards for the coming months, can the applicant still afford the loan if we went from four percent today to seven percent tomorrow?” Or seven percent in a year’s time.
Michelle May:	That’s also good to keep in the back of your own head anyway in case you’re looking at borrowing, whether …
Marcus Roberts:	I really, I strongly for anyone that I come in contact with to say, “Don’t just look at it as on today’s [day], look at it as can you still afford the loan if interest rates were to move against you by two percent?” Because it gives you that buffer.
Michelle May:	Yeah, absolutely. So, C number three.
Marcus Roberts:	C number three comes down to capital. What is it that you’re putting up? What’s your side of this? Where is the [inaudible] money coming from you the borrower? So, banks look at you and so, “Okay, well, you’ve come to us because you want a loan, but we want to see that you have hand in your own pocket as well.”
	Let’s say that you buy a home for 500 grand. The banks want to know that you have some type of genuine savings or something to offer towards the purchase. Without lender’s mortgage insurance, that would typically be 20 percent on that 500,000, looking at 100,000 of the purchase price out of your own pocket. If you are using something like LMI, that might be only five percent or, in this case, 25,000.
	If there’s no [herp] money from the applicant side, banks look at it as, “So, why couldn’t you just walk away from this?” There has to be something in it from the applicant to say that they’re on the hook for this as well.
Michelle May:	They see your deposit really as a commitment to them?
Marcus Roberts:	It is, yeah. And, look, banks might say differently. That’s certainly the way that we viewed it when I was working at banks, and that worked for business loans as well. So, you want to know, as the bank, that you’re giving money to someone that’s backing themselves as well.
Michelle May:	Yeah, of course. All that’s fair enough, isn’t it? So, C number four?
Marcus Roberts:	C number four is their collateral, the property itself. So, this is really where evaluation comes into play. If a bank’s lending against the property and taking a first mortgage over it, they want to make sure that what you’ve paid for is what the actual worth of the property is.
	So, if you’ve bought it for 500,000 dollars and then an independent valuer has gone in and side, “No, to be honest, I don’t know why they’ve 500 grand. It’s really only worth 400 grand.” The bank will only lend up to that 400,000 because they said, “Well, in an arms-length transaction, most people would have only paid 400,000 dollars for that. So, why should we give you more than what the property’s worth?”
Michelle May:	Yeah, absolutely. This is a huge big one, I think, especially with the clients I work with is that you absolutely know what the collateral, as the banks that calls it, itself. What is it worth because otherwise you could be in for a big problem.
Marcus Roberts:	Now, if you’ve had a loan for a couple of years, if you truly believe that the property’s gone up in value as in Sydney, especially over the past few years it probably has, it may be worth getting a reevaluation to see what your property is now worth. So, don’t just listen to the real estate agent that’s knocked on your door on Thursday afternoon to say, “Look, we’ve just sold 18 properties on your street. We want you to be our lucky number 19 and we believe that your property’s worth two million.”
	Now, pay the reevaluation fee or pay the valuation fee. It’s a few hundred dollars, but what it’s giving you is the opportunity to go back to the bank, perhaps, and this again comes down to your needs and circumstances, but if you bought something at 600,000 and you believe it’s gone up to 900,000 and you get a valuation that says that it’s now 900,000, suddenly you have more of a bargaining chip if you’re looking at using some of that equity towards either refinance or another purchase down the track.
Michelle May:	Absolutely, so that brings us to C number five.
Marcus Roberts:	C number five, so conditions, and really any factors that the bank puts on. So, one of the things that’s been very popular in the press recently, and from [Apper’s] Guidance, is putting a halt on investor loans, putting more emphasis on getting owner occupiers into the bank system, and by reducing the amount of credit that’s available for investors.
	Now, some of the conditions that you may see are interest only repayments capped at a certain period. So, if you’re buying an investment property, it may be a two year period of interest only, and then reverting back to principle and interest repayments. Now, in two year’s time, you can certainly go back to the bank and say, “Look, we’ve made those repayments as per the contract. We would like to go further with interest [inaudible] repayments.” So, then resetting it and going for another two years or three years.
	Or, another condition is something like equity release or cashing out for specific purposes. So, banks really like it when you have a specific reason in mind. If you’re just going to the bank and saying, “We just want cash out,” and they say, “What’s the reason? I just like it,” they’re probably not going to view that as favorably as, “I’m doing cash out for investment purposes” or “cash out to put towards the deposit of a new property.”
Michelle May:	Or even cash out because I want to invest in the property that I’ve got the mortgage in.
Marcus Roberts:	Absolutely.
Michelle May:	Add an extra bedroom, bathroom, but then …
Marcus Roberts:	Doing amendments and doing improvements to the property in question. Absolutely.
Michelle May:	Because if you do it right, you should get a better return than the money you’ve put in. Only if you do it right.
Marcus Roberts:	And, again, banks like that. If you’re making improvements to the property and you can then demonstrate that the property that you bought for 600,000 after doing some amendments is now gone to 700,000, then it’s helping the bank as well as yourself. It’s growing the property value for you and it’s also growing the security or the collateral value for the bank.
Michelle May:	Okay, so how do these factors all work together then? Do you have to have a tick in every box, in one of each five C’s?
Marcus Roberts:	Not really. It really comes down to each lender sees each of these really differently. So, one of the nice things about being a mortgage broker is that we get to see 30 different lenders and 30 different credit policies. If you’re just working with a mortgage broker and you have had issues with either bankruptcy or credit problems in the past, then they will know, “Okay, well, these are the banks not to go to because you’re probably going to get declined. These are the banks that we should be focusing on for the next two years until we get the credit issues under control.”
	If you have an unusual situation, there’s usually a bank that’s going to be right for you. In a perfect world, banks are only going to get applicants that have perfect credit history, have stable jobs, they’ve been working for 15 years on six figure salaries, they need 100,000 dollars of bank debt on a five million dollar property. Those are dream clients, but they’re not reality clients so to speak.
Michelle May:	Because there’s also the large number of people moving into New South Wales and Sydney from foreign countries, for example, who may not have that history in this country.
Marcus Roberts:	Absolutely.
Michelle May:	So, are there banks out there for them too?
Marcus Roberts:	It comes down to finding the right bank for the right applicant. So, foreign investors, if it’s owner occupied. If you’re self-employed. If your pay at YG, if you’ve worked in a job that receives bonuses or a yearly or on a quarterly basis, if you’ve had good credit history, if you’ve had poor credit history. It’s about finding the right fit for you.
	So, each individual client that we speak to is very different, so, as a result, it’s about seeing any of those 30 lenders, which of the ones to put forward to.
Michelle May:	Well, thanks, Marcus. That certainly help me break down what it is you need to get a successful mortgage application. So, if you know what it is, one of the five C’s.
Marcus Roberts:	So, the five C’s are character, capital, collateral, conditions, and capacity.
Michelle May:	Yeah, so as long as you can make it work for all those five, then there will be a lender for you out there.
Marcus Roberts:	And if you want to do some homework for yourself, if you are making that application for a loan, just go through it and write each of those down, and just think about how it relates to you individually. And put two sentences for each, which will assist in the application. So, putting that forward to your mortgage broker and saying, “Look, this is why I’m a good customer for a bank,” is really helpful.
Michelle May:	I will certainly put this on our website, sydneypropertyinsider.com.au, so you can revert back to our notes of this episode. And, of course, if you’ve got any questions for us, that’s why we’re here, send us an emails at [email protected] and we’d be more than happy to take your questions. I’m sure there’s other people out there, if you’ve got that question in your head, who would like to know the answer.
	Thank you so much for listening. We hope you found it informative and useful, and look forward to joining you again next week. See you later.
Marcus Roberts:	Have a great week.