Great interest rates if you are a great borrower

Interest rates for home and investment loans are at all-time lows. For borrowers with good profiles this is the time to access them. But what does a good profile mean?

Traditionally a good profile was one that relied heavily on the personal relationship you had with your local branch manager. Those days have long gone. As financiers have focused on reducing operating costs, and regulations have tightened lending to “unsuitable” borrowers in the wake of the Hayne Royal Commission, the borrowing and application process has become more commoditized and more standardized. This has resulted in both positive and negative outcomes.

The Positives

1. Rates are at their lowest seen in the current cycle. The RBA reductions and increased competition between the banks has resulted in downward pressure. The effect can be seen in the latest indicative lending rates.

Interest rates calculation

2. Debt servicing tests are at their lowest. Not long ago you needed to show you could service and repay a loan with a 10% interest rate, now this has dropped to as low as 5.5% for some lenders.

best rates for lowly geared good borrowers.

3. Application processes have become more automated. Automating decisions based on data scraping of your bank statements, automated credit scoring and data validation across your real estate titles, ASIC data and more. Without our mortgage brokering team, we are well down the path of implementing this for our family office clients, to avoid any unnecessary surprises.

The Negatives

  1. If you can’t show you have reliable, predictable income to service your debts, don’t count on a bank being there for you. What does servicing mean? It is your after-tax income less reasonable living expenses divided by the servicing hurdle rate of 5.5-6.5%. If you can’t do this, then your only option to borrow is via a non-bank private lender (or “No-Doc” loans) whose interest rates vary from 7.95% to 24%.
  2. You can’t hide your living expenses. For many years applicants could rely on the proxy for living expenses called the Household Expenditure Measure (HEM). In most cases, this understates your living expenses. Financiers will now review your bank statements and validate your expenses into living expense categories. At Cashel Family Office, we do this before making an application for debt on your behalf
  3. Past performance is the only indicator of future performance. Your bank statements, your employment and the financial statements of your self-employed business are the only indicators of future performance from a debt perspective. Your ability to validate your future behaviour is your past actual behaviour. Be careful what you’re doing on the record.
  4. Overdrawn accounts or late payments may be terminal. If you constantly pay your credit card late or have direct debits bounce, it reflects directly on your ability to demonstrate money management skills. Banks want you to be good money managers.

everything is on show,

and everything will be questioned.

  1. Gambling, afterpay and any other forms of what may be called “poor money management” will be considered and looked at less than favourably.
  2. Credit cards are the worst debt you can have. Most banks apply a penalty of 48% loading to any credit cards limits you have when assessing your debt application. If you don’t need them, close them.
  3. Car leases and expensive short term debts are also all considered to be indicators of poor financial management and are frowned upon by credit assessors.
  4. Your paperwork and corporate filling must be up to date. So if you are slow with your annual tax lodgements or seek to manipulate your financial statements to avoid paying tax, count on the bank not financing you. You need to consider the benefits that gearing can give you in generating wealth and lifestyle, compared to the small cost to ensure your fillings are done early and you pay some tax.
  5. Even the experts are confused about the regulations. Vanilla home and investment loans are simple. But should you need creative lending, count on many of the banks tying themselves in knots trying to work out if the new interpretation of the national consumer credit protection act or banking code allows them to do it.
  6. If you need money in a hurry, be very concerned. The service level standards of many banks have slipped, some can take as long as 90 days, only to give you a slow No. Even if some banks are 1-5 basis points higher on their interest rate it is often best to go to those who can give you a response quickly.
  7. Pricing is based on gearing, the lower your gearing the better the pricing. If your geared to 95% of your tangible real estate assets, don’t expect to get the same pricing as someone carrying less than 60% gearing.

What you should remember?

Applying for debt can be a simple process if you’re prepared, organised and have realistic expectations. Cashel Family Office’s expect mortgage brokers working with your relationship manager will work you through every step of the process. You can start the process today by completing our Debt Needs Analysis form.

Should you have questions regarding your own financing and mortgage brokering needs or simply wish to review your options. Please contact us to arrange a coffee.

Alternatively please read our January 2020 debt newsletter for the latest updates.

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