Toni from Riverstone NSW

Toni and her partner currently own three properties in their portfolio, located in Cessnock and Doonside, NSW and Chinchilla, Queensland. They adopt a buy and hold approach to their property investment strategy, with a view to developing in the future.

The pair look for properties with development potential that attract strong capital growth, however Toni says as their properties are all in the lower median price bracket, they have the additional benefit of excellent rental yields.

Their most recent purchase was the Doonside investment, which they snapped up due to its strong capital growth potential over the coming years, among other things. It is an older style, established home on a large block with development approval to subdivide and build two new homes.

Toni was attracted to Doonside as they formerly owned a similar property in the area, bought in 1996 and sold in 2002, achieving over 250% in total capital growth over the six year period. She says that the purchase price on their latest Doonside acquisition was the same as what they sold their previous property for in 2002 at $332,500, but on a better block and with the bonus of existing development approval, so they simply couldn’t resist this one. However the house is in relatively poor condition and currently only achieving $250 per week in rent as a result.

Toni says they will possibly develop the block next year and use the profits generated from the project to pay down their principal place of residence. They have no set goals when it comes to growing their portfolio at this stage, but hope to one day break into the western suburban market in Melbourne by securing a bargain at genuine 1990′s prices.

M & K from regional South Australia
Our second case study couple currently own six properties, including their PPOR. Four of their investments are in their home state of SA and one is located in Dalby Queensland. The couple’s most recent acquisition was a brand new 3 bed, 2 bath house in SA’s, South Plympton. Purchased for $422,000, the house just settled recently and is being advertised at a rental of $405 per week.

M & K’s strategy for their property portfolio is to buy and hold, with a preference for newly built or close to new homes that provide extra depreciation benefits and are a low maintenance alternative to older established properties.       

“Our properties all have relatively high rental yields and this has enabled us to purchase additional properties in a relatively short period of time,” the pair say, “We would like our next purchase to be a property that we could do some minor renovations to and get some immediate equity. As we live in a regional area this is a bit harder as ideally this property would be in a capital city.”

The couple bought in South Plympton believing it to be a strong location, half way between the CBD and Glenelg beach. They say there are good facilities nearby and the property is within walking distance to the bus, tram and train.

“The area should always be in demand for rental due to its location and our house has a private and public school and small shopping centre within walking distance,” they add.

M & K say that this property fits in perfectly with their current strategy of purchasing new, low maintenance properties and it is now their intention to start building equity in their portfolio, which is why the may look to properties where minor renovations can be made in the near future.

Although they haven’t put an exact figure on the amount of properties they would like in their portfolio in total, at this stage they are thinking it would be in the vicinity of at least 10 to 15, with their ultimate aim being to retire from full time work and live off the rental income generated by their portfolio.

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Most of the changes banks have made to credit policy have been to do with Loan to Value Ratios over and above 80%.

The problem has not so much been about the banks’ reluctance to lend borrower’s funds at this LVR, rather they are having issues when it comes to getting the nod from their mortgage insurers against new loans at these higher LVR’s. Of course this usually isn’t a big concern for investors because they generally tend to borrow @ 80% LVR.

To keep you informed and in the bank loop, so to speak, when it comes to LVR policy amendments, here’s a snapshot of some the changes we’ve seen recently;

AMP

• New customers to AMP can now only obtain a maximum 90% LVR.
• Existing clients with strong credit history can still obtain 95% Loan to Value Ratio.

ANZ
There have been a few changes at ANZ; they are restricting equity releases, unless the lender can demonstrate a definite purpose for the requested funds that they must provide evidence of. For example, a tax invoice from a car dealer or a contract of sale of a new, incoming property. Just stating that you are going to buy shares, or that the money will be used for future investment property opportunities, simply won’t cut it anymore. Actually, neither will a letter from your Financial Planner. ANZ are getting quite finicky on this point.

Another change we’ve seen from the ANZ is in an annexure sent to all of their clients who have a Line of Credit, stating that they can, at their discretion…

- reduce or cancel a credit limit at any time; and
- demand payment of any outstanding balance.

If you are concerned about these statements being added to your LoC (which you should be), you need to give us a call to discuss your options.

CBA
CBA have adopted AMP’s policy and will only allow existing clients, with strong credit history, to go above the 90% funding level.

Citibank
Maximum LVR is now 90%, including LMI. This is for new or existing clients.

Heritage Building Society
…have temporarily withdrawn their budget loan and professional package due to volume issues. They will re-introduce these products when they get on top of their current volumes.

Additionally, they will not do multiple units on one title. For example, a 6 or 4 pack of units on one title as they were known for doing @ 80% on residential interest rates.

ING

• Maximum refinance percentage is capped @ 85% LVR from another lender.
• Maximum LVR for purchases is 92% LVR inclusive of LMI.
• 5% genuine savings has to be validated for any LMI application.

St George
…have capped cash outs now to $10k. This means that if you apply to the “Happy Dragon” for a portfolio loan (their Line of Credit) and you want more than $10,000, unfortunately you can expect it to be declined.

Their offering of a 100% home loan is now withdrawn.

Westpac

• Maximum LVR is now 92%.
• 5% genuine savings has to be validated for all LMI’d loans.

Not really seeing too many changes at Westpac for the investor which is good. However in our experience, they seem to be a bit funny when you have loans of greater than $1.5m and they are all on interest only.

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Brisbane – state of play

It is simply amazing how quickly the weeks are rolling by; we are over half way through the year and on the down hill run to Christmas. We have had an extremely busy time over the past few months and it does not look like letting up in the near future. So where are all the buyers coming from?

Well like everywhere in Australia, there are a lot of first home buyers and this has kept the more affordable entry level sector of the market buoyant, even over inflated as some pundits say. The Government grant extension has ostensibly been absorbed into the price of property under $500,000. While this may be the case, we still think that activity will continue in this market post September and December as the grant extension is wound back due to low interest rates and no stamp duty under $500,000.

The market between $500,000 and $800,000 is steady and even increasing in some key locations. This is also the case for some areas of the inner west of Brisbane where housing commands a price tag between $800,000 and $1.2 million. These price ranges have recently seen a real drop off in stock levels and this has kept things buoyant with many properties experiencing multiple offers.

Generally speaking, properties that were purchased 12 or 18 months ago above these price ranges are currently selling for less than what they were purchased for, sometimes 10 to 15% below. This top end market segment is definitely a part of the market that is doing it tough at present and we think will continue to do so for some time to come, even with a limited amount of quality property on the market.

As mentioned, in certain key locations there is certainly a shortage of quality residential stock in the $600,000 to $800,000 price bracket. Those that are listed are either average quality, or were bought a short time ago and cannot achieve what the owner paid for the property in the heat of the market in 2007. Having said that though, if a property is priced correctly it will sell quickly, attracting good buyer interest from day one on the market. If it is over priced however, there is a tendency to see genuine interest from prospective purchasers in the first few weeks that will dissipate after that. The property will then languish on the market for 8 weeks or more, and if the vendor has to sell they will more than likely take less than what they could have originally achieved in the first place!

Like any market, if you know where to look and do your due diligence and research properly, you will find good opportunities all the time. This applies to properties in every price range, including those at the lower end of the market which is the most competitive at present.

If more stock does not list on the market in the next few months it could again be dire straights for many real estate agents who have been screaming for listings over the last few months. One agent I spoke to the other day said that if he could not get more properties to sell in the next month he may as well pack up and go fishing. Sounds good to me…the fishing part that is!

Scott McGeever is Director of Brisbane based buyer’s agency Property Searchers. For more information, please email – askus@propertysearchers.net.au or visit www.propertysearchers.net.au.

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As most of you are probably aware, the government is phasing out the First Home Owner’s Grant boost introduced last year in order to stimulate the waning economy of the time. As at the end of September, the bonus grant will be halved for three months and then revert to its original amount according to each state’s individual policy at the end of December (amounts can be confirmed through your local State Revenue Office).

While this might be a blow to those of you considering finally stepping onto the property ladder later this year, the real hurt for first home buyers has already hit, as some of the biggest lenders have started to shut them out of the market in anticipation of September’s policy change. In fact, there are now only two banks that will provide finance at the very attractive 95 & 97% Loan to Value Ratio (LVR) that currently allows first home buyers to use the government grant as their full deposit and borrow the balance plus costs; they are Suncorp and the National Australia Bank.

Many in the industry, along with the policy makers themselves, were of the opinion that as long as the Government kept the bonus grant in place first time buyers would continue to purchase their own Great Australian Dream and in doing so, keep the housing market afloat. But the government didn’t take into account one large potential obstacle to this intended plan; the mortgage insurance companies – especially the ones that insure any loans above 80% funding. These players insure risk and it would appear that they now deem the risk to be too great to take on…hence the reduction in LVR’s.

Essentially, it is now the lenders and mortgage insurers who are controlling the destiny of many first home buyers, not the government or their stimulus incentives as many might believe. The real concern for the banks is that a large number of first home buyers who have been purchasing entry level housing and in turn, propping up median property prices across most states, are doing so without truly being able to afford the commitments they’re taking on over the long term.

Sure, they might be able to scrape together a 5% deposit with the assistance of the government grant, but the banks are now questioning whether the large 95% mortgages first home buyers have been applying for are actually feasible from a monthly serviceability perspective. In other words, the banks are scared that we could end up with a very dire situation on our hands, both in terms of the finance market and the property market in general, if we end up seeing a plethora of foreclosures in the affordable housing sector over the coming years.

This about face in bank policy will no doubt impact, not only all first home buyers considering purchasing property, but also the large affordable housing sector that to date has more or less propped up the entire housing market in all of our major capital cities.

First home buyers have long relied on the government grant as their start up deposit, with finance taking care of the rest. Consider the following facts;

• Just a few weeks ago, a FHB in NSW could build a new home to the tune of $380,000, relying solely on the FHOG and stamp duty concessions.

• According to the latest Fujitsu JP Morgan mortgage industry report, 57% of FHB’s are borrowing more than 90% to get into their home.

• The same report states that more than 70% of FHB respondents said the first home owner’s grant was “vital” to their decision to act now when it came to buying real estate.

The requirement to save a deposit is usually the number one limiting factor for a FHB looking to enter the market. Wouldn’t we all say this is the main problem we faced when starting out? So what happens now that most lenders are only offering an absolute maximum 90% Loan to Value Ratio, including the Commonwealth and ANZ Banks, Bankwest, Westpac, Rams and St George, to name a few?

Some of the big boys, like the ANZ and Westpac, are even insisting on seeing 5% genuine savings over three months from any new applicants. So again, I ask you to consider the all important question that these changes will no doubt bring to the fore in the coming months; what will happen to entry level housing prices?

The fact is that first home buyers who would normally be entering the market in 12, 24 or 36 months time have been getting in now, meaning buyer momentum has been artificially buoyed to some degree and in turn, created a level of pent up demand. Real estate agents across the country are reporting that there is almost a frenzy of activity in the market solely fed by first home buyers. One local company here in Canberra has been selling 12 to 15 new homes a weekend to those just getting their foot in the proverbial property door and we are hearing stories of entry level properties attracting upwards of 40 young couples to open houses.

In my opinion, if the Government bonus was to stop or those last, two lone lenders who are still generous enough to offer 95% LVR loans withdraw their products, we will undoubtedly see a vacuum effect in the entire housing market. And herein lies the problem.

Unfortunately, given the lending shake up that we saw in the USA and UK off the back of the sub-prime mortgage crisis, it is understandable that mortgage insurers are starting to show concern at the fact there is no commitment or “skin in the deal” from these first home buyers who rely solely on the grant to get their application through and as their entire deposit.

The last of the 100% home loan offerings (from St George) is now a distant memory as this once prevalent finance product dies into extinction and 97% loans are becoming increasingly rare and difficult to find. I would even go so far as to say that the NAB and Suncorp offering of 95 & 97% LVR’s (95% + Capitalising Lenders Mortgage Insurance) will be short lived as Insurance Companies are, by their very nature, risk managers and therefore risk adverse.

So what can first home buyers expect toward the end of this year and into 2010? I believe we are going to see one (or perhaps all) of the following three things happen;

• All Mortgage Insurers will insist on seeing 5% genuine savings or will only approve a 90% LVR if the savings are “Non genuine” – i.e. a combination of FHOG and gift. Obviously if this occurs there will be less people able to qualify for a high LVR mortgage, meaning;

• The first home buyer segment of the market will come to a grinding halt, regardless of any FHOG stimulus boost from the government. And/or;

• People will enter the market earlier and the frenzy of first home buyer activity will crescendo, driven by a fear that the bonus FHOG will finish on September 30.

Needless to say, first home buyers will invariably have to rethink their strategy to get into the housing market as the year progresses and lending policies change, with ever tightening LVR restrictions making that all important nod from the “bank manager” harder to come by solely off the back of the first home owner’s grant.

Additionally, it is now time for all buyers to really consider those “good news” median figures that have been hitting the media outlets in recent months and seemingly illustrating a much more buoyant second half of the year in terms of property values than initially anticipated. In fact, it is my opinion that rather than taking off once more, general capital city median prices could slump further if first home buyers are forced to rethink that Great Australian Dream they had their heart set on as an early Christmas present. That’s not to say it will all be doom and gloom going forward, but I believe the ball will fall more and more in the investor’s court to really sustain medians in that positive territory toward the end of this year and the beginning of 2010.

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When I first started in the finance and insurance industry back in 1991, I’ll never forget being told that you can even insure a burning house for the right premium. And when you think about it, as alarming as that statement might be to some of you, it is actually very true! Well let me reassure you, the same goes for obtaining a loan.

By understanding the 4 C’s of credit, not only will you be able to ensure all of your future loan applications will be approved with little fuss or stress, you’ll also understand why well located, median priced residential property is the easiest asset class to use when it comes to securing credit.

So what exactly are the 4 “C’s” of credit and why are they so important? Quite simply they are;

1. Character of the applicant
2. Capacity to repay
3. Capital contributed to the deal
4. Collateral – what is used as security for the loan

Because of the lengthy explanation required to truly understand and appreciate the 4 “C’s” of credit, I intend to break this discussion into 4 parts, delivered to you over the next 4 issues of the monthly Trilogy report. All 4 related articles will then be posted onto the website so you can access them at any time for future reference.

So let’s begin with Part One, which deals with the first “C” of credit, being Character. In this segment, we will consider what a lender is looking for in the character of an applicant, exploring in depth where weaknesses can occur and more importantly, how you can overcome them in order to obtain that all important approval you’re looking for.

In this instance, Character isn’t about whether you’re nice to your Grandma or you take in stray animals and help little old ladies cross the street. When it comes to credit applications, specific character traits of the applicant that lenders are scrutinising include:

• Who is the identity borrowing the money? Are you applying as an individual, a married couple or a more complex trust structure?
• What is your previous borrowing history and who were the previous lenders you used?
• What credit enquiries are listed on your credit file?
• What is the history of your occupation/employment?
• Do you have a history of stability in your primary residence?
• What is your current Statement of position? i.e. assets and liabilities.
• What credit profile can be made of you, as the applicant?

Make no mistake, lenders will add all of these elements together in order to create a comprehensive profile of you, as an applicant. Some lenders use this criteria to credit score, and even though they won’t openly publicise it or tell you outright, the fact of the matter is you get more points for having a stable profile and longevity when it comes to your employment and relationship, how well you are asset backed (eg. if you have real estate as collateral) and your own abode. So the aim is to establish a good profile that is attractive to creditors.

Let’s look at each of the above bullet points and dissect them. This will help you understand some of those seemingly nosey questions you get asked when applying for finance.

Who is the identity borrowing the money?
This is fairly self explanatory; is it a trustee acting on behalf of a trust, an individual person or is it a married couple?
The truth is, different lenders like or dislike different borrowing identities. For example, Westpac Residential don’t like to do trusts with corporate trustees. That’s not to say they won’t deal with them altogether, but if going this route with Westpac you should be prepared to endure a long contract and painful journey.

Borrowing parties need to be properly identified from the onset, which is why you are asked for identification when applying for a loan.

What is your previous borrowing history and who were the previous lenders you used?
What have you done in the past when it comes to lending; who did you borrow the money from and how was that loan conducted? Were the payments made on time or were you continually chased for the repayments? This shows the lender how committed you, as the borrower, were to your previous loan obligations. If there is an obvious history of apathy, a lender is understandably unlikely to get involved with the borrower.

This is why lenders ask for loan statements for existing loans and credit cards. They are looking for the conductivity of other loans. As I’ve heard so many times from various banks, “If the applicant cannot make a repayment on time for a $5,000 credit card, why should we approved them for a $400,000 loan?”

The other point to note is who has given you money in the past. Was it a payday lender or was it a big reputable bank? The lenders you use tell future finance organisations a lot about you. For example, if you had numerous enquiries from Ford Credit on your file, it could be reasonably assumed that you upgraded your car regularly. It could also be reasonably assumed that you would have lost money on each of those transactions, which could then lead the credit assessor to reasonably assume that you don’t make very good investment decisions. See how this is gong towards building your profile? (There are exceptions here of course; for instance you may have a courier business and be buying a fleet over a number of years.)

Now there is nothing wrong with having one or two car loan enquiries on your credit file over a 5 year period, but I have seen in excess of 10 with some clients! If you have that many enquiries for that type of credit and you are applying for a speculative property loan, let me assure you that these will definitely go against you.

So what do you do to create a sound profile when it comes to your previous borrowing history and lender relationships? I would strongly advise that you ensure all of your repayments are made on or before the due date. Incidentally, if you were late by 3 days on last month’s repayments, making this month’s payment 3 days early does not mitigate that late payment. Furthermore, you should always be selective as to who you approach for finance. Remember, any lender you have a relationship with, or even request money from, will be listed on your credit file. So it’s important that the companies appearing on your history are credible and reputable, not flash-in-the-pan money traders.

What credit enquiries are on your credit file?
A credit officer can tell a lot about an applicant by the lenders and frequency of enquiry on the borrowers credit file. For example, are the enquiries on the credit file for consumer or commercial credit? Your personal credit file is broken into two parts; consumer – where credit cards, car loans and consumer enquiries are held and commercial – which incorporates things like your truck lease, business overdraft, and all business/investment enquiries.

The credit analyst is looking for anything that is abnormal to his lending policy. He only has access to the last 5 years of your credit history (apart from bankruptcies which are kept on file for 10 years) and is trained to believe that the last 5 years will reflect the next 5 years, give or take.

If there is an abundance of consumer credit enquiries over those five years, he could reasonably assume that this applicant liked to borrow for consumer items and wasn’t a very good saver. If the enquiries were predominantly commercial, that can tell the analyst a story too. He will be giving careful consideration to who the lenders were, whether it was cashflow business finance (which would suggest the business had cashflow challenges), or whether enquiries were made for real property, eg. the purchase of a commercial building.

The analyst will be asking; what lenders are on the file? Are they reputable lenders or are they lenders of a last resort type nature and if they were the latter, how frequently were these lenders used?

You can see how a credit analyst presumes a story from what they see, which is why it is so important to fully explain your credit file to your broker so that they can convey any history to the analyst and mitigate possible shortcomings in your credit file.

If you’d like to obtain a copy of your credit file, please contact us here at Trilogy and for a small fee we can do this on your behalf, or you can go to this link and register to be notified whenever someone accesses your credit information.

What is the history of your employment/occupation?
Are you self employed or are you a PAYG employee? How long have you been in your current job or industry? Are you a tertiary educated applicant? If you are self employed, what is your primary industry? Do you hold ongoing contracts? Are you in the medical field or some other type of area that isn’t usually impacted by an economic downturn or recession, or are you a luxury car salesman who will potentially be severely affected? All of these questions are more pieces in the jigsaw puzzle of the applicant’s character.

Different jobs, as you can imagine, are viewed differently by lenders. For example, if you are employed as an unskilled labourer you will be viewed differently than say, a registered nurse. It could be perceived that an unskilled labourer may find it difficult to retain employment during tougher economic conditions, whereas a nurse’s clientele (patients) are typically not economically driven.

Now to be fair here, if you were a labourer and had been in your job for 3 years or more, having worked in that particular industry for 5 years or more, you’d be looked upon exactly the same as the Registered Nurse when it came to your credit personality. Of course the same theory applies for the nurse; if they had floated in and out of numerous jobs every 6 months or so, the credit assessor would be concerned as to why they had such frequent changes to their employment status, particularly if their home address had changed just as often.

I know longevity in the workplace might seem kind of boring, particularly for all the Gen Y’s out there, but you can’t beat stability in employment on a loan application. It tells a story of consistency and dedication; all the things a lender wants to see. Changing employers and/or industries will be looked upon unfavourably and go against the applicant. But remember – it can all be mitigated if there is a story to tell.

Do you have a history of stability in your primary residence?
This one is more for those of you who rent; as with employment history, a lender likes to see that a borrower has shown some stability at their home address. Of course this isn’t always possible, what with landlords selling their properties or moving back in and forcing the tenants to move on, or a share house situation coming to an end, but again this is something that should be explained to your broker. The applicant that has had multiple addresses over a 5 year period does beg the assessor to ask why. There is usually a story and this issue can be mitigated if the story is reasonable.

An example that the assessor doesn’t want to see is the applicant that has had a number of failed relationships and has moved out to a new address, seemingly repeating this pattern time and time again. In general, changing employers and addresses frequently does ring alarm bells for credit assessors and these applications are typically difficult to get over the line without a healthy deposit mitigating risk from the lender.

Don’t think you can cut out addresses on you loan application and get away with it either, because previous addresses are recorded on your credit file and assessors will cross reference your application with your credit file. When it comes to applying for credit, honesty is truly always the best policy.

What is your current Statement of position? i.e. assets and liabilities.
We sometimes receive credit applications back from lenders with the comment “poor SoP for age”. Now this is not some strange insult reserved for the finance industry, rather it actually means that the applicant’s “Statement of Position” is not up to scratch when compared to someone else in a simular industry at a similar age.

It can mean that the applicant has a lot of “toys” instead of a lot of tangible assets, like a good superannuation fund, cash in the bank, shares, equity in property or even a car. The lender is really saying that this person, during their working career to date, has not spent their income wisely or saved sufficient funds for a rainy day and of course they are concerned that this habit will follow the applicant going forward.

Once again, the good news is that a weak SoP can be mitigated if there is a story to tell regarding a change in personal circumstances, such as a divorce or a return to full time study to better one’s employment prospects.

Here’s an example of what lenders like to see; a full time employed labourer in the same industry for more than 5 years, who has some cash savings (this might only be $2,000, but is better than nothing). A reasonable superannuation balance, relative to the time they’ve been in the workforce. Car ownership or a small balance on a car loan to be finalised and equity in their owner occupied property. The equity may only be 30 to 40%, but this shows stability and commitment to their SoP.

Here’s what they don’t like to see…an accountant who has been in their job for more than 5 years, driving a BMW for which they owe more than its worth, in possession of frequent flyer credit cards close to, or at their limits, with no savings and a deposit for the new house they’re after that was not saved, but came from a deceased relative.

Can you picture yourself as the credit assessor and see the difference? Just because the accountant makes more money, it doesn’t mean they spend it more wisely. The old rule of, “He who dies with the most toys wins,” really doesn’t work on a loan application.

What credit profile can be made of you, as the applicant?
As you read through all of these points, you can start to see how a credit officer will put together a profile of you, as the applicant. Remember, many potential glitches in your history can be mitigated if there is a solid story to tell, which there often is. But if the general character is even slightly questionable, the loan is either going to be heavily conditioned or declined. The Character of the applicant is equally as important as the other three “C’s”; Capacity, Capital, and Collateral.

On the other hand, if the applicant demonstrates excellent Character they will be given leniencies on what they can do as a reward of sorts. For example, if an applicant is stable in employment and has an excellent Statement of Position, bank policy could be bent to accommodate their requirements. I’ve often heard credit managers say, “This applicant can have whatever they want from us.”

Isn’t this a much better position to be in than trying to explain a bunch of shortcomings?

A bit more on the subject of shortcomings; when a lender is assessing your character and finds a weakness, it can be countered by a strength. For instance, your character may have been damaged by a previous default of a loan, but this can be countered by contributing more cash towards the transaction (Capital). In other words, the applicant can put more deposit into the deal or as some lenders call it, more “hurt money”. This demonstrates that the applicant is prepared to commit more to the deal and override their past character deficiencies.

If you’d like to know more about the first “C” of credit – Character – or what is on your credit file, feel free to give us a call and we can walk through what you might need to do in order to repair any potential damage and/or maximise your chances of success next time you are seeking finance.

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