Financing for Investors in the Current Post APRA environment 2015

Hi All

Biz has asked me to post on financing and dealing with banks...in after APRA have tightened the noose on investor lending

New to property, looking to learn as much as I can.

Here are my thoughts:

1. You need to understand your limitations well. If you have less than a 20% deposit...in most instances the banks are no go. However, there are many institutions which are funded or backed by banks..they even use the same bank accounts as the Big 4...i.e. RAMS. They will still lend you up to 88%, 90%, and even 95%. These are not advertised but available...some do not put these through broker channels as they use their own fronts. Lots of these funders...but they are not going to be available by brokers who use mainly banks.

2. Understand the area you are purchasing...some banks will have valuers who low ball the area and your finance get declined just on the advice of some idiot valuer who has not idea. I tend to either present recent sales as a back-up or challenge the valuer to get this through. The last one I did embarrassed everyone at a Big...they waived my LMI!

3. I know this is a big ask before you put a loan in try to understand what their policies are. Unfortunately...most brokers even don't understand this. The best way to do this is to work with a banks who will provide an approval in principal before it is formally submitted and credit check is done. FInd the people in the banks who will put the extra yards by clearing your loan in principal even with the LMI guys.

4. If you have the 20% deposit..use the banks who do not use Genworth or QBE. Westpac, St George and other now use a company in the West Indies to insure loans. They will have a portfolio around the world and will be more inclined to go easier with Aussie loans for diversification within reason.

5. Would not recommend it but some people have put loans through as PPORs and then due "changed circumstances" have converted to IP loan.

6. If you are rejected ..ask why...if you smell a rat...push it through and make a lot of noise. I helps if you understand the basis of the rejection. There is a lot of younger staff who are making poor decisions...they are poorly trained screen jockeys..the senior guys will make a judgement call on a marginal loan based on the following: your stability of address & job, amount in your offsets, payment conduct over the years, your track record of investments, etc. In another wards present your case like a business loan. If you have a large loan ensure it get to Head of Credit if possible. My last loan went to NSW GM .....

Ask away if you have more specific questions...eveyone's circumstances are different..will try to answer or ideas to tackle the issues if possible.

One last thing...one thing you can't get around is serviceability...if you don't have money to feed yourself in the end ...the loan is not going to happen.

 

A couple of things - don't mean to pick so please take this as intended

This is not true at all - up to 90% is still easy peasy for most people.

Any broker worth their salt will have a good idea about bank policy - going to each lender to find out their policy by getting pre-approvals is a bit silly. Having lots of quick hits on your file is a great way to get declined for finance.

Of course I'm biased, but using a good broker will help you avoid a lot of all this for a heap less effort.

 

Your not advising people that having a load of cash in the offset account helps with a loan approval anymore?

Regarding Rams and other lenders, they may not be on most brokers panel, but many brokers will have ways of dealing with many of these lenders, and do if the circumstances warrant, even if they don't receive commission.
In practice these lenders have very small niches, and its just not realistic for many people to do the research required (at the level required) to investigate these lenders one by one, especially if they don't have an understanding around credit, or cant get access to a written policy document or serviceability calculator etc. They are simply relying on the word of an employee (usually remunerated by commission) of the bank, who may or may not know what they are doing.
I agree a lot of brokers do a fair bit of assuming around policy, and use the same 2 to 5 lenders most of the time. This is partly the brokers fault, partly the clients (many want to deal with the big 4) and mostly the GFC which consolidated the market. There just aren't as many lenders to deal with since.

 

@Biz see....


Rolf....yes...88% is the best value for money.

As stated previously...rent reliance is negotiable with certain lender.

I also said to test without a credit score hit....a really key point.

Easy peasy ...but the PC people are not average..most serious ones have 3 more properties...

Again..as I said to Rolf....the trick is to do the pre-work prior the the credit check...do you have a relationship with a banks like that??

 

OK see your points...agree that serious investors need to be informed. They can be lazy either..good point...I see a lot of these..where they simply want to dump "find me a loan with a Big 4" on a brokers lap...and then are surprised when they can't get a loan.

Hey are you with Choice Loans? Do you do a lot with Porter Davis qualification loans?

 

come on Sash, I haven't done with you on the Druie post, and yet you started this....

 

You're right that PC people aren't average, but I think you're assuming they're all like you and they aren't. There are many many PCers who have 0, 1 or 2 IP's or even 4 or 5 + who can get high LVR loans without much trouble at all.

I think perhaps while your experience is very valid and right for you with your portfolio, it's not necessarily advice that suits the general population.

If you write on a general forum for people to go and get a heap of pre-approvals with no credit check, people are going to go fry their file. You can't just rock into ANZ and ask for a fully assessed pre-approval with no credit check. And because you haven't named the lender/s who will do this for you, that is exactly what people are going to do.

If you want to give advice like that, you need to be specific or you'll do more harm than good.

 

Thanks for starting the thread Sash.

Based on what you have outlined though I still can't see how that would be a better way of doing things compared to just using a good broker who understands your situation and is across the policy of a lot of lenders. Clearly it has worked well for you though. Just seems like a lot of extra leg work for not a lot more benefit?

 

I works for me...here are some examples:

1. Was told could not get a loan with SunCorp as ..went to them directly. Have about $1.5m with them. Also have did the deal of putting down 10% on one property with another 10% in term deposit. The deposit was returned upon revaluation of the construction loan where the property grew 30% upon construction loan.

2. Was told by 2 brokers I had hit my lending capacity. Again went directly to the banks financed with 10% deposits (pre APRA).

I guess...my strategy works....otherwise I would have gone back to brokers. Personally..people need to be as skilled on the finance side in order to really grow a very large portfolio.

The proof is in the pudding....

 

To address some of Sash's points:

1. Of the big 4 banks only Westpac limits investors to 80% LVR. ANZ is effectively restricted to 90%, NAB and CBA will fund to 95% LVR, but frankly it's generally not cost effective to go above 90% for the reasons Rolf has outlined. Coincidently plenty of brokers do have access to RAMS through back channels, but prefer not to as the process is a bit clunky.

2. Valuers generally aren't instructed to lo ball valuations although they do tend to err on the side of caution. Valuations have become a lot more transparent since lenders started giving brokers access to the valuations. In my experience the odds of a low valuation on a purchase are about 1 in 50. Certainly people people are disappointed with valuations for refinances, but the valuers can generally justify their position (even when the result is very conservative). It's an ongoing issue but I can't see how smaller lenders are going to give consistently better results, they tend to use the same valuers.

3. Any broker who doesn't have a good understanding of the policies of the lenders they're dealing with shouldn't be a broker.

4. All of the bigger lenders and quite a few second tier lenders have a Deferred Underwriting Authority (DUA) with their mortgage insurer. This means that if you meet that lenders criteria the application is never reviewed by the mortgage insurer. Smaller lenders are less likely to have a DUA in place and thus all >80% LVR applications are reviewed by their mortgage insurer. The odds of a last minute problem with the mortgage insurer is far more likely when using a smaller lender over a larger lender. The real trick is to understand the limitations of lenders DUAs. Under the right circumstances, we've been able to fund upwards of $3M in loans for a client all at 90% LVR. You'd never achieve that with lenders that don't have a DUA.

5. Putting an IP loan forward as a PPOR loan can be tricky if you're purchasing out of town. There can also be servicing implications. I somehow think lenders would take it very poorly if it were discovered. Also keep in mind that in some states you actually make a statutory declaration to the government that this property will be your PPOR.

6. Absolutely agree with this. If a loan is rejected with one lender you need to understand the specifics of why. It may or may not be possible to salvage the application with that lender, but at least having more information allows you to target the next lender more specifically.

 

Sash

From my experience, APRA hasn't affected me that much. Meant I had to change which lender I did my development with but that's ok. Still on track to buy a few more IPs thanks to the rising markets I'm involved with.

So your original points, from my perspective (as an investor across 3 states)

1) Haven't had any issue going 90% with banks. Works out better going a bit less anyway, as when you do top up afterwards this is limited so may as well finance at the same rate you can top up at.

2) There's great and idiot valuers in every area. I think if you buy well, you reduce how much this matters.

3) Any broker worth his salt knows all the policies back to front and side to side. They know which one you fit best with, and a few moves ahead like in chess. I can recommend if needed.

4) Pretty rarely buy with 20% deposit so not sure on this one. I like leverage

5) Agree on this one - always play by the rules.

6) Never seen anyone ever get declined. Brokers run the scenarios through all banks first and then choose the best move, as per #3 above. In the rare occasion there's no best moves, get advice on what you have to do to position yourself better. Brokers generally develop good relationships with banks BDM's and assessors in to clarify things with them and see what would fly before submitting it.

Please don't take this as a dig at you because its not, but it seems a lot of people like to over complicate this. I like just signing mortgage paperwork because I have a broker I can trust and know that he has my best interests at heart. Show me the money all day long.

 

OK let me ask the question...have you got any references of clients you have got to 20+ properties which you have exclusively worked with?

The guys I am currently using have clients who have over 40....and still going...

Agree that my situation is different... but people need to realize the first "no" is the first step to a "yes" from another lender...

 

Yes, I have a few clients with 20+ properties, I've financed all of them. The paperwork is a freak'n nightmare.

Admittedly most people max their serviceability out at 3-5 properties. It all depends on the price point, cash flow and their own incomes. How many properties you can buy very much depends on the properties you are buying.

 

Tell me about it...it gets even interesting when you have a holding company also.

Well if you got them to this point pat yourself on your back!

Agree with you on the 3-5 maxing out..the thing is to do it slowly and gradually..some people are in huge rush!

 

Most clients use multiple trusts. Their intention is generally to mitigate land tax but there are certainly lending implications with the right structures (combined with the right financials) which can help.

Using multiple holding entities combined with neutrally or positive geared properties can effectively extend your serviceability indefinitely if the deal is presented properly. It makes APRA look like little more than a blip.

One client has everything in his own name, he says he never saw the point in trusts. Has quite a high income as an IT contractor, single with no real commitments. He buys very astutely and usually adds value to his properties. He managed to get to property 15 before being restricted to 80% LVR.

And yes, it wasn't achieved overnight.

 

So, is the old 90 the same as the 88 except for the cost, or does 88 do something to keep you under the radar so to speak.

And the fish and chip shop, does that mean pepper & company etc, I did a loan from someone else and it came back as someone else as the actual lender, someone I would not go to myself direct.

Why does it matter how many enquiry there has been if you have a history with good loans, it seems shopping now would be more likely than before, surely they will recognise this .....surely if you have someone who knows what and why your doing certain things.

 

Porter Davis in house broker is a choice franchise. I don't work for that franchise, about 9 months ago I bought my own choice franchise.

I have previously worked with Simonds and Burbank in their in house teams and continue to work with smaller builders as well. Construction loans, high LVR low deposit fhbs are my niche. I personally have 6 investment properties and that's how I found somersoft/pc.

 

A lot of lenders credit score. It's an automated system that takes lots of factors into account. One of which is how busy your credit file has been. For these lenders, it's scored before a human picks up the file. There's no arguing. They have modelling to show that applications with more than 5 enquiries recently are a good chance to turn bad (for instance), so they decline the loan.