With increased scrutiny by financial authorities on lending practices, banks have tightened their requirements, impacting investors trying to secure finance for property. Here are 4 practical steps investors can take to better their serviceability.
2017 marked a year of increased scrutiny of banking lending practices by the Australian Prudential Regulations Authority (APRA), resulting in banks implementing tougher procedures for obtaining investment finance. The guidelines had a profound effect, with numerous investors in our 2018 investor survey indicating that securing finance is now the biggest barrier to starting or growing a portfolio.
One key factor in obtaining finance approval is serviceability: banks must minimise the risk of defaults on repayments, and therefore will calculate how able you are to service (pay back) your loan over its lifetime. They use bank-specific calculators to compare your income (job income, rental income, child support etc.) to your outgoings, which includes living costs, debt and ongoing costs.
Due to the APRA interventions over the last 2 years, banks now take a far more conservative approach in their serviceability assessment and therefore, despite being able to service a loan based on your own calculations, in a bank’s system you may not pass the serviceability test.
Here are four practical steps you can take to improve your chances of success:
Step 1 – Easy credit is a liability
Credit cards are ubiquitous among Australian families but must be taken into account when applying for finance. A bank will consider any kind of ‘easy’ credit a liability and therefore each credit card you own will be calculated as being a debt to the value of the credit card limit. That means if you have 2 credit cards with a limit of $10,000AUD each, the bank will consider you to have a debt of $20,000AUD and calculate a percentage of that amount as ongoing expenditure. Paying off your credit card on time or not using your credit card at all will have no impact on the bank’s calculations.
An easy step to increase your serviceability is to cancel any credit cards you don’t use, and possibly lower the limit on the ones you do use. Make sure you pay off the credit cards you do decide to keep on time. Accumulating debt on your credit card will affect the bank’s assessment of your creditworthiness.
Step 2 – Keep a record of your income
This is particularly important for those who are self-employed: keep your financial records up to date so you can prove your actual take home pay. If your business has become more profitable and income has improved over the past months, you should be able to adequately demonstrate this or the bank will use your previously lower income in their calculations.
Step 3 – Pay down debt and decrease ongoing costs
Phone plans, subscriptions and ongoing costs will all be added to your monthly expenditure, each in turn slightly lowering the amount the bank will lend you. Non-deductible debts, such as car loans, will also weigh against you.
Check that you really need that new phone on the more expensive plan, and close off any recurring payments for services you no longer need. Pay down as much of your debts as possible. Potentially consolidating short term debt into longer term debt can help to lower your repayments which in turn helps your serviceability.
Step 4 – Get professional help
With the banking environment in constant flux in the last 24 months, it is now more important than ever to work with a specialised investment broker, who has the knowledge not only of the lending landscape but also understands your unique situation and requirements. They can help you find the right product and assist with any further questions you may have on how to increase your serviceability.