WINNING A LOAN
William de Ora
Are you aware that when borrowing money from a bank there are three rules of lending? When it comes to lending you money, all lending institutions, such as a bank, have very strict criteria.
Of course all banks say they want your business. At the same time they must minimise their financial risks. What this means is they want to know they’ll be able to get their money back from you. Like any business, they have policies and procedures in place to regulate who they do business with.
Knowing how a bank determines your capacity to repay a loan, or whether or not you’re a good risk for them, will mean the difference between getting finance for your investment property or not. Here are the three rules to be aware of. The first is serviceability.
Being able to service your loan is very important for the bank or institution. What they look at is your ability to service the loan based on your current monthly expenditure. This includes all general expenses, and they’ll assess your current level of credit card debt.
Because overspending on your credit card(s) is arguably the most common mistake that leads to financial stress, when it comes to credit card limits, lenders are very aware of the negative effect these products can have on a household or personal budget. Especially if they can see that your credit cards have not been used or managed well.
What’s important to know is that banks look at how much credit you have available, as opposed to what your current balance might be. They work on the basis that you could max your cards out, and then have an unserviceable debt. Although credit cards currently have a 0% offer, have several credit cards just in case you may need them is not a good idea. It could work against you when looking to borrow from a bank or institution.
Banks are into minimizing their risk levels and the best security they can get from you is something that can be sold. This is why they’ll want you to put your home down as security. Property holds its value long term, and can be sold easily if required.
A side note about how a bank values your property. Generally, a bank valuation on your property is at the lower end of the scale. Again, they’re all about minimizing their risk and therefore work with the lowest common denominator. When working with a bank, they simply want to be confident that you have the ability to be responsible for your debt.
Banks take a number of factors into account when they consider your application for a loan. However, one of the most important criteria is your credit file. Most clients I meet don’t know the status of their credit report.
Your credit report contains all sorts of information about your financial history, including your mortgage, credit cards, and any other loans. Banks looks at your past history because in their mind it’s an indicator for what could happen in your future.
Checking your credit file, even if you’re not about to borrow any money is a wise decision. Demonstrating to a bank that you are a person with good character simply means that you are responsible for managing your debts without any bad credit history. The best way to have a good credit history is to make sure that your monthly payments on bills such as electricity, phone, mortgage repayments are done on time and ideally in full. A free credit history is available. Either Google this, or speak to your mortgage broker.
When it comes to your financial future, the more that you know about you, and the more that you can think from a bank’s perspective, the easier it may be to get your loans approved. So, take the time to look at your current financial circumstances and evaluate if you are a good risk. Consider these questions. Can you service a second mortgage? Do you have enough collateral to put up as your security? Do you have a good credit history?
Is it not a wise choice to be prepared, than to be disappointed?
THE WRITER IS THE FOUNDER OF IPNA-INVESTMENT PROPERTIES FOR NEW AUSTRALIANS. HE WAS BORN IN SRI LANKA AND IS A BEST SELLING CO-AUTHOR OF THREE BUSINESS BOOKS.