Having a one year old means I’m surrounded by children’s books. These books are simple and honest, intended to inspire young minds about life’s many concepts. They’re quite picture-full too, a welcome change from all the wordy grown up stuff we adults get to read on a day to day basis.

Of the many books, a favourite has been “We’re Going on a Bear Hunt” by Michael Rosen and Helen Oxenbury.

Some of you may not have read this book, so bear with me (haha see what I did there?)

For those of you that have, you’re welcome, the warmth of a good throwback is free of charge.

The story goes a bit like this:

A father and his three children go on a bear hunt. It’s a beautiful day! They are not scared.

Along the way they encounter several natural obstacles which they can neither go over or under. Thus, they have to go through them.

Eventually they arrive at a cave in which they find their bear. It’s a big one!

They get scared, race home, through the obstacles, into the house, shut the door, up the stairs and under the covers. They will never go on a bear hunt again.

In narrating this adventure to my little boy, I can’t help but draw a parallel to the process of obtaining a loan. Think about it. You start off wanting to buy a thing that needs a loan. You start searching online for rates and then look at fees and then pick up the phone or go into a bank. You are encouraged to submit an application. A week passes and you get an email saying you have been declined because your application didn’t fit policy.

So you try again. Cross off the first bank and go to your second one. This time, you tell the banker that the last bank didn’t approve you because of their policy and this banker says, “it should be fine with us”. So you put through an application. Another week passes and your phone rings. Turns out, you can’t borrow the full amount you require, because the calculator has changed. Doesn’t help you buy what you want to buy if you’re short on change. Doesn’t matter if it’s a car dealer or a kebab joint, the prices are what they are.

What if I told you that this is not a rare occurrence. What if I told you that many times when approaching the limit of what you can borrow, often times slight changes in policy can throw off your application.

So you start off optimistic, but after a couple of blows, you don’t feel so positive anymore. Not about the thing you want to buy though, you still want that. The process of obtaining it though, becomes too tedious!

…Almost like never wanting to go on a bear hunt again!

This is where a broker can help. At least one that you enjoy dealing with on a regular basis.

When navigating the credit landscape on your own, if you submit an application whilst a policy is being changed in the background, you could be given bad news by that bank. Not only that, they won’t be able to give you an alternative because they only represent themselves. This is understandable but also immensely frustrating.

Engaging a broker that you enjoy dealing with means that if you face a sudden setback by one bank, not only will they be able to find an alternative bank to place your application, they will also communicate with you the process in a way which you can best relate.

It’s like being told what you wanted wasn’t available but in the next sentence being assured that there is an equivalent alternative. And if there isn’t an equivalent alternative yet, you can be sure your broker will try to find you one soon.

Compare the two:

Specimen A

“Hi am I speaking to Jess?… I’m sorry to inform you that your loan has been declined. Our policies changed recently and I’m afraid you no longer fit our criteria. All the best.”

Specimen B

“Hey Jess, I’m sorry that your loan with A got declined. It sucks I know, because their policy changed this week and the amount you need can’t be done anymore. It’s okay though, I may have a couple of alternatives for you. One of them in particular is quite quick, so we can fingers crossed still make your deadline. The rates are comparable as well. Leave it with me, I’ll send you an email about it in the next hour.” 

Which would you prefer?

In short, when faced with obstacles to finance the thing you desire, you’ve got to go through it and who better to do that with than a broker you actually like.

Maybe that could be us.

If you would like to have a frank and honest discussion about financing something you want, why not get in contact with us. If you like us, we would like to be the ones who journey with you and help you find your alternatives 🙂

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Thank you.

Big words!

Cross collateralisation is where you provide the same bank with more than one property as security for one or more loans. It falls within the realm of structuring your loans, which can be a daunting topic for some as we like to maximise our returns, without having to “think too much”. Bear with me, as cross-collateralisation whilst risky, can also be a very useful approach if understood and done correctly.

You may already know or have read in one of my previous posts that the banks’ general magic number is 80% LVR (loans to value ratio). What this means is that if your loans exceed 80% of the value of the property that secures it, then Lenders Mortgage Insurance (LMI) will apply.

Something you could do instead of paying more cash towards a property so that your loan required is lower, is to offer another property to jointly secure the new debt. That way, the loan is calculated against the total value of both properties. This can have the effect of reducing your overall LVR to under 80% so that you can borrow more or refinance with ease.

The second property doesn’t have to debt free either to be offered as additional security. If the second property also has a loan against it, but the total of it and the new loan divided by the total value of both properties is less than or equal to 80%, then it could still work.

(I must add a note here that 80% LVR is in reference to houses. Where apartments and other less common property types are concerned, the maximum LVR could be lower. Speak to us to make sure you understand what the maximum LVR is for your situation.)

Also because you are offering a second property as additional security to secure a new property, the loans will likely have to be with the same bank unless the new bank is happy to accept a second mortgage over the additional property. Where the additional property has a debt attached to it and the new bank doesn’t want to take a second mortgage over it, then the debt would need to be refinanced to the new bank too.

In short second mortgages take less priority as a first mortgage. This means that in the event of a default, and the property is sold, the proceeds will be used to pay off the loan to the bank with the first mortgage, and the remainder to the bank with the second mortgage. This is not a risk most banks like taking because if the default is known to the public, then the property sale could be a fire sale and fetch significantly less than market value.

Now, if cross collateralisation is this simple, are there any disadvantages of doing this?

Having more than one property secured by the same bank can mean that the bank has the right to sell either house in the event of a default. As such, if you can, you would be wise to only mortgage one property to one bank and each additional property to a different bank respectively. That way, you don’t risk losing a high performing property when you face difficulty making repayments on an under-performing one.

Imagine you bought your first property in a strong growing suburb. It’s been 2 years since you bought it with a loan at 80% LVR, that now the LVR is only 65% because whilst you have been paying down the loan per normal, the property has experienced strong growth. So you decide to purchase a second property (you’ve done well for the first one, so you’re confident you can do it again!).

Because you used most of your savings to purchase the first property, you struggle to find the cash to purchase the second one. So you have an idea – that is to offer the first property as security so that you can borrow the amount you need against both the first and second property. If the loan you required against the second property was 90%, now because it is secured against that and the first property, the total loans LVR is 78%, so you’re good to loan the money to settle the second purchase.

3 years pass and this second property isn’t doing so well. Also you’ve come into some financial difficulty and making repayments is becoming harder and harder leading you to default on the second loan. Since the properties are still cross collateralising the second loan, the bank can choose to sell the first property (because it is the higher performing one, thus should fetch more at sale). You try to convince the bank that the second one should provide sufficient return from a sale but ultimately, the bank has the right to sell either.

This isn’t what you wanted at the start.

So what you can do about this?

As property investment is a long term endeavour, cross collateralisation can be viewed as a short term solution. For instance, if you wish to refinance your loans to a different bank and one loan has an LVR that is higher than 80% whilst one loan is under 80% LVR, cross collateralising both loans could bring the LVR under 80%, saving you paying LMI a second time of the former loan.

Chances are you wouldn’t buy a property if you knew in advance that it wouldn’t grow in value. As such, you would expect your property to grow during every year of ownership. Doing your best to release each property such that they only support one loan should be your focus if you choose to cross collateralise. This means that by making additional repayments and with annual valuations of both properties, once your loans can be individually held at an LVR of 80% or less, you can request for the bank to change the structure such that each property only secures one loan respectively.

Now, you are free to refinance both loans individually.

In summary, cross collateralisation allows for you to enter the market and capitalise on an opportunity where you would have had to otherwise wait till you had saved up enough of a deposit. Yes it exposes your existing property to the risk of another loan on a second property, where a default on either loan can lead to you losing a property of the bank’s choosing. Thus cross collateralising shouldn’t be viewed as a tool of convenience. Rather it should be seen as a temporary measure, where your focus after cross collateralising would be to pay down debt strategically so that the loans can be separated as soon as possible.

If you currently own property and would like to have a frank and honest discussion about how this strategy could help your situation, please get in contact with us.

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Who doesn’t love a good package? I sure do. Especially the ones that make sense without having to think too hard!

Sure, we like our independence, to not be “sold to” in a shop when we visit them to purchase one thing. Then again, can the occasional cross-sell really hurt? Think about that phone case that was bundle with your new iPhone when you got your new phone plan. Bet your screen is in tact because of that phone case that was “thrown in”.

Businesses selling products or services package their offerings because it enables you to experience more of what they offer in the hopes that you will come back for more in the future. In the process, you also spend more time and money with that business than you would had you just purchased one or two items.

More often than not, packages make sense.

Fast food restaurant value meals, entertainment voucher books, back to school bundles, the examples are all around us. Bento Boxes!!

Sometimes, packages don’t make sense, like buying a super cooker pot off an infomercial because you would get 20 other accessories with it if you called NOW. You did, and a month later, you are still trying to figure out where to store the damn bits! Free is good, but not when it is useless or never used.

Occasionally, a packaged item may end up being more valuable than the original item you were interested in. I once attended a wedding where the groom’s dad was telling us how he got to know about his son’s new love. One day, dad gets a call from his son and it goes like this, “Hey Dad, guess what, I’ve met this guy who has the same sense of humour as me!” …”Okay?”… “Best part is, he has a sister and she has the same sense of humour too!”

When it comes to banks, they utilise loan packages to include a variety of products so that you would make them your main bank. In today’s day and age, it is easy to open up an online savings account at one bank because of the interest rate, then a credit card with another bank because of their rewards program and then a car loan direct from the dealer because it was just convenient. As such, your home loan is a great opportunity to consolidate all your banking to once place.

Let’s say you are interested in taking up a loan with Bank A and a package is offered to you.

We will start with the online savings account in Bank X. Most loan packages include an offset account. Would you rather earn 2% interest and pay tax on it or save 4% interest on the same amount of money? The latter of course! That’s your savings account consolidated from online Bank X to the Bank A.

What about the credit card? Most loan packages will include a credit card free of charge (with or without a free rewards program). What this means is that if you are able to earn comparable points with Bank A without paying the annual fee on your card, it would make sense to close off your existing card (but after you spend the points you’ve accumulated of course).

That car loan? Since home loan interest rates are lower than vehicle finance interest rates, once you have settled your home purchase, in a few months, you could have your house revalued to see if there is any equity available to borrow funds to pay out your car loan. Most loan packages do not charge a top up fee or loan establishment fee for additional loans within the package. The benefit to you is a no cost, lower interest rate vehicle loan in the end with lower ongoing repayments too because the loan will have a 30 year term, not the usual 7 years for car loans. Be sure to check that there are no exit fees on the car loan itself before doing a pay out.

The biggest benefit of taking out a loan package with a bank is the discount margin negotiated on your loan. For example, if the standard variable rate on your home loan is 5.50%, the discount margin negotiated could be 1.30% meaning that your effective rate is 4.20%. It is this 1.30% that justifies taking out a loan package as this margin is noted in your loan contract. Also should you desire to borrow more in the future with the same bank, the aim would be to negotiate a higher overall discount i.e. an increase of 1.30% to 1.35% to apply to all loans held with that bank.

In addition to the above benefits, loan packages tend to include fee waivers for ancillary services such as annual valuation of properties you hold with that bank, no fee redraws from your variable rate loan etc…

Loan packages aren’t free though and generally attract an annual fee of $395. Some banks will charge less such as ING’s $199. The idea is simple. For a flat annual fee, you get the benefits above plus more if you take out more loans with the same bank.

Occasionally, a bank will offer a fee waiver for the first year. Rarely but this does happen, a bank will offer a package fee waiver for the life of that loan as part of a limited time campaign.

When it comes down to it though, there will be features that you will take up and there will be features that you will like having as part of the package but never ever use. So the best way to ensure you are getting value out of any particular loan package is to work out the dollar spend for the features that you will actually use. By doing this comparison, you don’t get swayed by who has the longer list of benefits.

For example, if you hardly ever travel overseas, having someone tell you that “This loan package costs $395 a year but if you use the platinum credit card that comes with your package, the free travel insurance pays for itself” is a moot point.

So who are loan packages for?

If you are someone who loves having all your products in one place, then a loan package will suit you.

If you are someone who likes to think about the value you are getting but not so much thinking that you must compare every item on the list to the exact items on the list next door, then a loan package will suit you.

If you are someone who will maximise your bank’s product suite because you like the convenience a particular bank brings, then a loan package will be a loan brainer.

Not all loan packages are the same. This point is important. So be sure to speak with us for a frank and honest comparison of the various loan packages available.

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Valuations can sometimes feel like presenting a course to the judges as a contestant on My Kitchen Rules. There are so many factors and the stakes of a less than favourable valuation are high.

At Liveable Loans, we are mortgage brokers, not valuers. What that means is that we don’t actually conduct the inspections, analyse the data and then generate the valuation report. This report then is used by the bank to support your loan application. What we do though, is come across valuation reports regularly as they are required by all loan applications.

As such, we are able to shed some light on how the valuation process influences your loan application.

We’ve talked about LVR and why it matters here. To work out your LVR, you basically divide the loan you require by the value of the property. Thus if the loan you require is $400,000 and your property is worth $500,000, then your LVR (loan to value ratio) is 80%.

But how do you work out how much your property is worth? Well, you don’t, banks do. And how do they do it? By utilising independent property valuers.

In addition to the property’s value, banks rely on valuation reports to determine whether the property is an acceptable security to the bank. Criteria for acceptability include floor size, title type, risks etc. We cover this in the next article.

The process of obtaining a valuation is a random one. By this we mean, banks request a valuation to be conducted on a property and this request is placed with a valuation system such as Valex. The valuation system will usually have a panel of valuers. From the panel, a valuer is selected at random. The reason for this is to ensure that the process is fair and not susceptible to gaming. This also means that if you have requested a valuation on your own accord, even if the valuer you used is accepted by the bank, your report likely won’t be. That being said, there have been instances where banks have accepted borrower organised valuations but this is the exception, not the rule.

When a valuation is requested through a system like Valex, sometimes an automated valuations may be conducted rather than a physical one. This is because in some locations, there is sufficient data from historical sales that the system can generate an estimated value based on the data alone. This can be extremely helpful in saving the bank costs and also the borrower time. If an estimate is satisfactory in obtaining the loan required, then it doesn’t matter in that instance that the value of the property estimated wasn’t as high as it could’ve been.

If however, an automated valuation isn’t up to scratch because the data is old or skewed, then an actual valuation can be ordered, the outcome of which will override the automated valuation, regardless of whether the actual valuation is higher or lower in value.

Actual valuations can be done in two ways: kerbside or full. A kerbside is self explanatory, in that the valuer merely visits the site and determines the property’s value without entering the premises. Sometimes, if there is sufficient market data for a location, a kerbside will provide a sufficient indicator of the property’s value.

With a full valuation, a full inspection is done. To carry it out, the inspector will have to make an appointment with  the owner of the property or the leasing agent to inspect the property. The inspection usually takes 15-20 minutes but helps in situations where the inside of a house has been refurbished whilst the outside kept the same.

Whatever the valuation report states, that is the value that the bank will rely on, even if it is lower than what you think or in the case of a purchase, the contract price.

The cost of the valuation is usually covered by the bank as their way of winning your business. If you are dealing with a broker who has a good relationship with some banks, those banks will allow the broker to request upfront valuations which are essentially obligation-free. This means that if you are wanting to refinance your home loan and the valuation conducted doesn’t provide a favourable outcome, the cost is swallowed by the bank because no application results from it. Also if you have a loan package, generally the bank will allow one free valuation every year. The aim of this is to encourage you to borrow more money as your property(s) grow in value.

In the next article, we will discuss the various factors that valuation reports highlight and how they affect the outcome of the valuation overall. Following that, we will discuss what you can do if your valuation outcome isn’t a favourable one (valuations are conducted by people after all, and as such can be subjective).

If you would like to know more about the role valuations play in your particular circumstance, please get in contact with us below for frank and honest discussion.

Thank you for taking the time to read this article. We hope you found it beneficial. If you feel a friend would benefit from reading it, please share it with them. It will earn you many friendship points and help us grow this blog into a resource that will help many.

Previously, we discussed how when obtaining Lenders Mortgage Insurance (LMI), the property you choose plays a part in whether LMI gets approved. If you require LMI, particular externally assessed LMI, then having LMI approved directly affects your finance being approved.

In this article, we discuss the how your purpose and character also affect whether LMI will be approved or not.

What is “purpose”?

It’s what you use the money for. Generally speaking, LMI is afforded for residential purchases and refinances. However, not all residential purposes qualify.

An example of this is development finance or the financing of land to build multiple residential dwellings on a single title. Another example of this is refinancing of commercial buildings with the aim to develop residential dwellings.

In summary, if you are purchasing a home or residential investment property, the purpose criteria is satisfied subject to LVR restrictions. The restrictions will vary depending on the risk of the scenario. A good example of this is when building a new home. If you utilise a licensed builder, generally the maximum LVR is 95%. If you wish to build the home yourself as an owner builder, the maximum LVR is 50%. It’s a huge difference, but further emphasises the differences in risk for both scenarios.

The next criteria is “profile”. This one tends to be more subjective but Insurers have more or less come up with a list of things that help determine whether you’re a good bet to insure or not.

Savings is a profile factor. What we mean here is if you are a high income earner and have been for a reasonable amount of time, yet you have little to no savings to your name. If you have little to no debt as well, it could mean that you spend too much and thus even though you don’t have any contractual financial obligations on a month to month basis, your character suggests that you likely won’t be able to make your monthly repayments on a new loan, no matter how much you swear you’ll change.

Thus there is a condition for genuine savings of at least 5% of the purchase price in order to qualify for LMI. In summary, you are required to show that you have been saving the total 5% you required to put towards the house deposit over the course of 3 months. Insurers have common sense in this regard so if you are a renter presently about to purchase your first home, the rent you pay can be considered as part of genuine savings because if you weren’t renting, and living at home, you would have saved that rent money.

Consistency and self dependancy being key, large lump sums from gifts or inheritances or rebates are disqualified as genuine savings.

Also, your income plays a role in whether LMI will insure you too. Workers compensation and unemployment benefits are examples of incomes that are unacceptable to insurers. The reason is simple, something bad has happened that suggests that your ability to repay any new debt will only get worse, not better. You can liken this to the way health insurance companies view pre-existing conditions. I know, this can seem harsh and unsympathetic and on a case by case basis, sometimes harsh and unsympathetic it is. Some might even argue that because the payouts are consistent for a set duration, thus satisfies the reliability aspect. Then again, new debt with interest compounded probably isn’t in the best interest of the victim now benefiting from workers compensation. Bear in mind, the difference between LMI and health insurance is that Lmi doesn’t protect you – it protects the bank.

As you can see from our three part series (part I and part II), there is more to LMI than just a simple fee you pay to borrow more money. LMI is available for borrowers who wish to get into the market earlier because if some are honest with themselves, the market will grow faster than they can save despite their best efforts. Biting the LMI bullet is alright and many do it. The key is to actively manage the process and understand clearly the parameters that are permitted prior to knocking out inspection after property inspection and making an offer.

Remember, the main objective, the whole reason you decided to borrow money in the first place, is to settle your purchase successfully. So ask for help, and it shall be given. Get in contact with us for a frank and honest discussion around what you need to do to be “LMI-ready”.

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There are two major providers of LMI (what is LMI? click here) in the market: Genworth and QBE. If a bank providing the loan doesn’t have an adequate DUA (delegated underwriting authority), where they approve the insurance themselves, then LMI is approved externally by either of the two providers above.

What this means is that whilst a bank may be happy to lend you money, there is a chance the insurer may not. Generally speaking, loans above 90% are referred externally for review, but this could be lower depending on your property type and personal situation.

So what do Genworth and QBE consider?

By the time they receive your application, the bank would have worked out that you can afford the loan. So their focus switches on to your property, purpose and profile. We cover the property in this article. Property factors include: individual property risk, property type, location and title type.

The one you just bought…

Once you have purchased a property, a valuation is generally conducted to ascertain the worth and eligibility of the property to be financed by the bank you’ve been conditionally approved with. If the property valuation notes environmental risks such as high tension wires being too close to the property or that the location is prone to flooding or bushfires, these individual risks could cause the insurer to decline your LMI application.

Property Type

Property type is a dense discussion as the list all the different property types is quite long. Common examples include high density apartments, luxury properties and large rural blocks of land. For these high density apartments, LMI may be incurred from LVRs as low as 60% because of how small they are and slow property price growth . We discuss this as a factor of a whole in our article on buying apartments here. It also makes a difference whether you buy an existing apartment or a new one as the LVR thresholds differ for both.

Luxury properties (properties with loans over $2 million) are another group of properties that insurers don’t like to take on. For these properties, the general understanding is that if a purchaser requires LMI to purchase a luxury property, then their income position isn’t strong enough to hold that property and given that luxury properties turn over far slower than regular residential properties, the default risk is not worth protecting a bank against.

With big rural blocks of land that have dwellings on them, LMI is applicable for blocks up to 40 hectares on a decreasing LVR scale. Reason being anything more than that likely isn’t being purchased for residential purposes but rather to commercially develop in the future. Also these blocks don’t turn over quickly meaning that in the event of a default, there is a good chance the shortfall will be large. LMI providers don’t like that.

Location

If the insurer feels that your property is in a suburb that is over-exposed, they may decline your LMI application due to the fact that property prices may be forecasted to decline due to oversupply. This is location risk. As a result, some postcodes are restricted from LMI being offered altogether. The lists are updated for each state regularly so it is always worth checking before making a purchase. Thus if you are purchasing a high density apartment off the plan, adjacent to a restricted postcode, it is best to assume that you may not be able to obtain a loan with LMI when it comes time to settle your purchase as it is likely population growth may add your postcode to the list sooner rather than later. Insurance is all about hedging risk so expect insurers to be more conservative in their approach. Protect your hard earned deposit.

Location risk also means that properties are graded according to categories. A simple way of describing this is metropolitan areas (established areas which are low risk) to rural areas (smaller towns with  fluctuating property prices). Thus if you are in a Category 1 location, LMI is more likely to be approved with higher LVRs permitted compared to something that isn’t in a category at all where LMI may not be applicable.

Title

Finally, there are some title types that aren’t supported by LMI. These include Crown Land outside ACT, company title, non-residential zoned properties to name a few.

Recognising that your property type, location and title type can determine whether you get to realise your dream of property ownership means that you should always consult us prior to making your purchase. Assuming LMI will be approved when it isn’t applicable or not up to the LVR you require can be a very expensive assumption.

First step is finding out how much you can borrow. Once you know, if you require LMI, next step is making sure that you will be able to settle your desired purchase. Get your two thumbs up!

If you would like to discuss any of the above further with us, get in contact for a frank and honest conversation. We’d love to hear from you.

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