How to get the right mortgage broker for you?
Mortgage broker…as you keep reading this section, ask yourself two basic questions. Are you buying property for your principle place of residence or as investment to make money? Your home is an emotional decision, not an investment decision!
How much can you borrow for investment property? The amount varies greatly from lender to lender and their criteria in terms of rental income and negative gearing is used. Ask yourself…how much can I borrow or should I borrow based on this criteria.
The key is making sure you understand what you’re doing. Don’t just blindly follow someone else’s advice. Its your future, you want to understand the reason for every decision you make with your money.
So what about finance? Property is not about bricks and mortar, it’s all about finance. The biggest finance tip is to team up with an experienced and connected mortgage broker which specialises in investors with multiple properties…
Mortgage broker tips:
- Reducing your credit card limit improves how much you can borrow on your home loan
- Cancel credit cards you don’t use because lenders take credit cards into account for calculating how much you can borrow regardless of whether you use these credit cards or not
- Consolidate personal debt, always look for the opportunity to consolidate any personal loans which have a higher rate of interest and impact on your borrowing capacity
- Check interest rate on any store cards from a department store, look for the opportunity to consolidate because these cards impact the amount you can borrow
- Family benefit payments are considered by some lenders for determining your borrowing power
- Is your financial situation or employment likely to change in the near future?
- The amount you can borrow reduces as you reduce loan term, interest you pay also reduces…
Why leverage a mortgage broker for your real estate investing? Seems obvious doesn’t it? Save yourself the hassle and get some help.
If you really want to do well in property, you can’t just pick a good mortgage broker; you need an awesome mortgage broker because there is the property owner and there’s everyone else. Are you the property owner?
The owner collects cash flow month after month and builds real wealth through equity and appreciation…
Everyone else chases deals or does another strategy which pays them once. The property owner can leave on a month-long vacation while their portfolio continues to bring them reliable income. Everyone else stops getting paid as soon as their last deal wraps up.
The only true wealth in real estate is built by property owners. Everyone else simply “works” for a living while claiming they are “investors”. Want to become a property owner even if you can’t get bank loans and don’t have down payment money to buy right now?
A bank will only lend you money if you don’t need it…if finance doesn’t go to plan, you won’t know why and you won’t know how to fix it. That holds pretty much true today because banks don’t want real estate, which is the main reason banks are scared of owning real estate…it sends an icy shiver down most banker’s spine.
Banks are in the money business not the real estate business, they don’t have the dedicated staff, resources or expertise to operate real estate and they typically don’t understand the market…ultimately, they’re the lenders and you are forced to play by their rules…
Banks are not experts in leasing or management which are key to whether a property is profitable or not and can pay back its loans which is one major difference why a piece of real estate on a banks “books” is a liability and not an asset.
For every piece of real estate a bank has to take back a “loan loss” must be booked and a reserve placed in cash to offset a portion of that loss. Net result is less cash to lend, less profit to the bank, less cash flow to operate and possible exposure to liquidation.
If a bank restructures a “non-performing” loan by lowering the rate, payment or lengthening the loan term it is able to move loan into a performing status.
One of the reasons for a residential loan being flagged is the footprint on your credit history, which can get you knocked back by an electronic credit score.
A refusal or knock back could easily be avoided if your mortgage broker is pro-active in using the allocated resources at their disposal to find out whether a specific deal is going to get knocked back prior to lodging…
In regard to hits on your veda credit file and getting red flagged in credit scoring, there are many variables which make credit scoring and banks keep most of their lending criteria under lock and key, they don’t like to waste time assessing deals which get knocked back.
Banks consider its a waste of their resources, so generally give mortgage brokers big clues, as well as relevant people to call for an opinion prior to lodging an application.
Banks want to focus their efforts on clients that are actually going to earn them money from deals which get approved and not wasting time on deals which shouldn’t have been lodged.
A good mortgage broker would do their due diligence and ring prior to lodging a deal. They would ask questions like, “I’ve got a client with this situation, is it going to get red flagged? Is it going to waste your time?”
Some banks use tight credit scoring and don’t like hits on a veda, some banks don’t care about veda credit file, they might knock you back over something else, however every bank is looking for a certain type of customer.
A good broker knows which banks do and which don’t use electronic credit score which is a more cut throat method because there is no room for explanation. You’re probably thinking whats the list of banks that do and don’t.
Unfortunately there is so much more to it than just hits on your veda. Bank policy documents are lengthy. Some banks credit scores still flag you even if you took out credit and payed it off quickly.
Some banks look at how you payed off the credit and give you points for paying it off fast. They’re all different in the way they lend. Other red flags can be triggered by moving house, changing employers, changing occupation, change of marital status, getting credit for a car, the list does go on…
The good news is because every bank has a different policy, the end result is they’re all in the business of lending money, you just need to match their policy. Banks want an area of the market, so wherever you fit in, remember someone wants to lend you money.
Make sure your mortgage broker or financial advisor ensures your recommended financial strategy is affordable, safe and you’re protected.
Make sure your broker provides comprehensive advice on a large range of financial issues and works with you to identify your specific and individual goals.
Does you mortgage broker support you in achieving your financial results and is commitment to the development of quality client relationships?
A key to achieving this is maintaining the communication continuity, while offering financial strategy solutions ranging from one off advice to ongoing guidance ensuring your financial plan continues to support you in achieving your goals.
Is your mortgage broker under an Australian Credit Licence and authorised representative of an Australian Financial Services Licence, which means they have experience, skills, operational processes and financial backing to provide financial services, as determined by the Australian Securities and Investments Commission (ASIC)…
Based on your circumstance a mortgage broker looks for a “good fit” lender, which fits your circumstances with the best opportunity of getting your deal over the line. At the end of the day hits on your credit file may narrow down the choice of lenders you can choose.
However a good mortgage broker knows how to avoid those lenders. You just need to be upfront and work closer with your broker in addressing all their risks and which lending criteria fits your situation.
If you’ve had changes in employment, occupation or any other potential red flag event occur in your recent past you’d probably be smart to not approach that bank…does that make sense?
A pro-active and knowledgeable mortgage broker is a very important part of your team, however finding a good broker which helps can be a challenge because not all brokers understand the needs of property investors and many are not experienced investors themselves…
A good broker already has extensive experience in finding finance for property investors and have established good relationships with lenders, meaning they are able to source good financial products.
- Standard variable
- Basic variable
- Introductory rate loans
- Fixed rate loans
- 100% Offset loans
- Equity loans
- Line of credit
- Construction loans
- No deposit home loans
- Lo doc / no doc loans
- Non-conforming loans
- Credit impaired loans
What specific and pertinent questions would you ask a good broker? Definitely ask what their property investing experience is and whether their clients are property investors. The best source of questions to ask come from other investors which have been through an evolution of brokers/bankers.
Ask for three references, then talk with clients regarding why they changed brokers and learn there lessons without learning the hard way. You’ll find there are lots of differences in how they obtain finance and all have lessons they’ve learnt along the way, but they all change brokers/bankers for a reason, if you can find out those reasons you’ll know what questions to ask and what to avoid.
The biggest must for your mortgage broker is they must have a good understanding of property investing and know how to structure so you can move forward. Your broker needs to know the best way to finance your deal and take into consideration what you plan to do with the property in the future, and help you plan regarding your next purchase.
Some pitfalls you want to avoid in structuring your lending:
1. Cross collateralisation of property which is securing the mortgage on the back of a new property can’t be sold while its providing security. Cross collateralisation doesn’t allow you to sell without restructuring.
Banks love cross collateralization because you are locked into purchasing the second property with them…
2. Losing the ability to claim interest as a tax deduction. Heres how this can occur…you live in your principal property of residence (PPR) using Loan A and your paying off principle of loan because you don’t have an offset account.
You decide to rent out PPR and purchase a new home with loan B, so you redraw money to pay down loan B from loan A because you want the smallest loan on your PPR, however what happens at tax time?
Because the purpose of your redraw in loan A was to make a deposit and pay down loan B for your new PPR, that portion of loan A is not tax deductible even though its attached to your investment property…
3. Adding value to a property to access equity, yet not being with a lender which lends you more cash to purchase again
4. Being put with a lender which uses credit scores, when you would of been a much better position if you had gone with a lender which doesn’t use credit scores because you’ve recently moved house, obtained credit recently, changed jobs, etc…
5. Plan your lending in advance so you’re not getting your loans with one bank just to get better interest rates. It doesn’t make sense!
There is also the all monies clause. What if you default on one of the loans. If this happens when times get tough, lenders can put a call on your whole portfolio. What if you can’t pay back the money? Banks will sell all your properties.
Its putting you in a vulnerable situation with too much risk and gives the bank too much power…
What process builds solid relationships helping a mortgage broker to get onside and secure more loans for you? You just need a broker which is good at what they do, understands what you want to do and gives you the time.
Some brokers won’t do much for you until you have a property in mind. That is not the right broker you want to be dealing with as an investor. Your relationship helps you get educated if you can call your broker to ask questions so you know where you stand and what deals you can take on.
You also want to make sure your mortgage broker knows you want a loan which is cost effective. You need to be careful of fancy and useless packaging which makes money for other people and doesn’t actually save you money.
The reality is banks use lovely sounding words like ‘honeymoon period’ etc…in order to attract you to their product.
It is important to remember your broker is representing you, however they’re paid by the financier a commission when your loan goes through. Mostly this doesn’t matter, yet you need to be sure your broker is recommending the best products for you.
You don’t want a broker which only thinks for their own needs and delivers the highest commission for them. Generally brokers get an up-front commission and sometimes a smaller trail commission paid throughout the life of your loan.
The banking or mortgage needs for every investor is different with different needs depending on project and stage in their investing.
The volume of finance needed varies from tens of thousands of dollars right up to tens of millions of dollars, depending on project and level of experience of investor. Some investors want to focus on reducing interest rates and other costs, while others place a greater importance on loan flexibility and serviceability.
Time can be a critical factor when it comes to finance so you don’t only need money, you also need it by a certain date or your deal falls through. Investors need a broker which is available to communicate and able to deliver according to deadlines.
Depending on the creativity of deal at hand, securing finance on time for a difficult project can be a challenge. Good brokers are able to deliver or at the very least offer constructive solutions. If the deal stacks up, there will always be a way to finance it…
Mortgage brokers must understand all steps and processes involved. When starting out, it can be difficult to find the right broker which is available to provide advice and service for smaller deals.
Bear in mind, it can take as much time, effort and work to put through a small deal as a big deal, yet the return to the broker in commissions on a smaller deal is significantly less.
The right mortgage broker for you does exist and he/she is happy to service smaller loans knowing these add up in the long term and as investors get more experienced they bring bigger deals for finance to them as well
Be aware of the caveats and pitfalls which can result in financial loss rather than benefit. It is important to understand the details and exactly what your mortgage broker is doing for you. Why? Because you want to ensure your mortgage broker actually gets you a much better deal than you could have gotten yourself…