8 The truth about financing

Question 1

What was the purpose of the meeting between the author and the bankers?

Answer 1

To discuss securing a $500,000 loan to buy more investment properties.

The meeting involved exploring financing options for real estate investment.

Question 2

What was the interest rate offered for the deposit?

Answer 2

Three percent.

This was the rate offered on the deposit required for securing the loan.

Question 3

What interest rate did the bankers charge on the loan?

Answer 3

Seven percent.

This rate was significantly higher than the deposit interest rate.

Question 4

What concept does leverage refer to in real estate investing?

Answer 4

Being able to do more with less.

Leverage allows investors to use borrowed funds to acquire more properties.

Question 5

What does LVR stand for?

Answer 5

Loan-to-valuation ratio.

LVR expresses the amount of money you can borrow relative to the property’s valuation.

Question 6

What is the maximum percentage of a property’s purchase price that you can typically borrow?

Answer 6

Up to 80 percent.

This is the standard borrowing limit without too many troubles.

Question 7

True or False: Just because a financier is willing to lend a large amount of money means it is in your best interest to borrow it.

Answer 7

False.

Borrowing large amounts may not align with an investor’s best interests.

Question 8

What is the secret to getting financiers to approve a loan application?

Answer 8

Take away all the reasons for them to say ‘no’.

Understanding the lender’s perspective is key to approval.

Question 9

What influences the lending industry in Australia?

Answer 9

Federal government’s monetary policy and consumer credit laws.

These factors shape what lenders can and cannot do.

Question 10

Before deregulation, what characterized the Australian bank lending market?

Answer 10

Little competition and basic loan products.

Most loans were structured as 25-year mortgages with monthly repayments.

Question 11

What is the role of mortgage brokers in the lending process?

Answer 11

To act as intermediaries between lenders and clients.

They earn commissions from lenders upon loan approval.

Question 12

What are the two main components of a loan application?

Answer 12

Personal information and details of the property.

Both components are essential to assess eligibility.

Question 13

What documents are typically required to prove income for a loan application?

Answer 13

Copies of payslips, bank statements, and tax returns.

These documents help gauge repayment ability.

Question 14

What is considered ‘mortgage stressed’ in relation to income?

Answer 14

When repayments exceed one-third of the borrower’s gross income.

This indicates potential financial strain.

Question 15

What is the significance of employment history in a loan application?

Answer 15

It determines the stability of income and job security.

A reliable employment history is viewed favorably by lenders.

Question 16

Which professionals may have access to special loan deals?

Answer 16

Accountants, lawyers, and doctors.

Membership in professional bodies can lead to favorable loan conditions.

Question 17

What should you consider before providing information in a loan application?

Answer 17

What information is required, why it is needed, and how it will be processed.

This ensures the application is viewed positively.

Question 18

What information is included in a personal financial statement for a loan application?

Answer 18

Assets, liabilities, income, and expenses.

This helps lenders assess the borrower’s financial situation.

Question 19

What are the three key issues to consider when providing information to a lender?

Answer 19

1. What information does the lender require?
2. Why is that information needed?
3. How is the information going to be processed?

Question 20

What is included in a personal financial statement for a loan application?

Answer 20

A personal financial statement includes a list of assets, liabilities, income, and expenses.

Question 21

Why is a credit check important in the loan approval process?

Answer 21

A credit check reveals the applicant’s credit history, including loans, late payments, and defaults.

Question 22

True or False: A credit record can sometimes contain incorrect entries.

Answer 22

True

Question 23

What should you do before submitting your loan application regarding your credit history?

Answer 23

Obtain a copy of your credit history to check for incorrect entries.

Question 24

Fill in the blank: It is recommended to only authorize the _______ after all other criteria have been evaluated.

Answer 24

credit check

Question 25

What should be included in a proof of income letter for a loan application?

Answer 25

The letter should include the entire package: superannuation, fringe benefits, bonuses, and not just the cash component.

Question 26

What is the Loan-to-Valuation Ratio (LVR)?

Answer 26

LVR compares the funding sought against the independently assessed value of the property.

Question 27

What is the maximum LVR to avoid mortgage insurance?

Answer 27

80 percent

Question 28

True or False: Mortgage insurance protects the borrower in case of default.

Answer 28

False

Question 29

What is the difference between mortgage insurance and mortgage protection insurance?

Answer 29

Mortgage insurance protects the lender, while mortgage protection insurance covers loan repayments if the borrower becomes sick or disabled.

Question 30

What are honeymoon rates in the context of loans?

Answer 30

Honeymoon rates are initially low rates that may cost more over the life of the loan due to associated fees.

Question 31

What do registered valuers consider when assessing a property's value?

Answer 31

They consider the price of other houses sold in the area, details of the dwelling, and may inspect the property.

Question 32

What is the potential consequence of borrowing more than 80 percent of the purchase price?

Answer 32

It flags you as a higher credit risk in the lender’s system.

Question 33

What is a common strategy to improve loan application success?

Answer 33

Establish a connection with an insider at the lending institution.

Question 34

Why is it important to learn about the lending industry?

Answer 34

Understanding the industry allows better communication with lenders and identification as a sophisticated investor.

Question 35

What does pre-approval signify in the loan application process?

Answer 35

Pre-approval indicates a preliminary assessment of the loan amount the lender is comfortable providing.

Question 36

Fill in the blank: A poor _______ history can lead to difficulties in obtaining financing.

Answer 36

credit

Question 37

What should you do to address weaknesses in your loan application?

Answer 37

Directly address any weaknesses and provide more information than necessary.

Question 38

What is advised regarding the use of unrealised equity to fund growth?

Answer 38

Using unrealised equity increases credit risk and is viewed as dubious by lenders.

Question 39

What should you do to avoid being flagged as a risky applicant?

Answer 39

Ensure all information provided can be supported by external documentation.

Question 40

What is the recommendation for making repayments on a mortgage?

Answer 40

Make principal and interest repayments as part of a sensible debt-reduction program.

Question 41

What factors could lead to a loan application being rejected?

Answer 41

1. Poor-quality security 2. Bad credit history 3. Lack of supporting documentation

Question 42

What is one way to improve your chances of securing a loan?

Answer 42

Network before needing a loan to build relationships with lenders.

Question 43

What is pre-approval in the context of loans?

Answer 43

The process of determining a loan figure that the lender is comfortable providing based on your current financial situation. ## Footnote Pre-approval is not a guarantee of loan approval when the formal application is made.

Question 44

What does final approval depend on?

Answer 44

The details of the property being purchased, which are only known once a deal is found. ## Footnote This is why pre-approval is beneficial even if it does not guarantee a loan.

Question 45

What is one common issue investors face when acquiring multiple properties?

Answer 45

They fail the debt-servicing test because their incomes cannot support additional loan repayments. ## Footnote This often happens when repayments exceed 33% of their income.

Question 46

What does being maxed out mean for an investor?

Answer 46

They cannot borrow any more money. ## Footnote This limits their ability to grow their property portfolio.

Question 47

What is a key strategy for maintaining borrowing capacity?

Answer 47

Having a non-investment source of income. ## Footnote Lenders may view investors with only property income as 'rent reliant'.

Question 48

What is the maximum percentage of the purchase price that should be borrowed?

Answer 48

80 percent or less. ## Footnote Borrowing more may lead to mortgage insurer rejections.

Question 49

Why is it important to be correctly structured when purchasing investment property?

Answer 49

It protects assets, minimizes tax, and enhances borrowing ability. ## Footnote Buying in your own name can increase risk and tax liabilities.

Question 50

What is the advantage of dealing with business bankers?

Answer 50

They provide better service and insights into structuring applications effectively. ## Footnote They may also approve deals outside normal lending criteria.

Question 51

What can quickly stunt the growth of a property portfolio?

Answer 51

Running out of finance. ## Footnote Continuous financing is crucial for property deals.

Question 52

True or False: Lenders do not want to write loans after the global financial crisis.

Answer 52

False. ## Footnote Lenders need to write loans to maintain profits, so they want business.

Question 53

What should be prepared before needing funds for property investment?

Answer 53

Building a finance network. ## Footnote This facilitates sourcing loans at better interest rates when a deal arises.

Question 54

What is a strategy to get a lender to approve a loan?

Answer 54

Take away all their reasons for saying 'no'. ## Footnote This involves addressing potential concerns proactively.

Question 55

What should you check regarding your credit record?

Answer 55

Ensure it does not contain inaccurate information. ## Footnote You can obtain a copy at .

Question 56

What is a recommended starting point for new investors?

Answer 56

Chatting with professionals at . ## Footnote This can provide valuable insights into investing.

Question 57

What is the purpose of a loan application checklist?

Answer 57

To ensure the application has the best chance of being approved. ## Footnote It helps track necessary steps and documentation.

Question 58

Fill in the blank: The maximum LVR with no mortgage insurance is _______.

Answer 58

[maximum LVR] ## Footnote This varies by lender.

Question 59

What types of loans should you inquire about with a lender?

Answer 59

Fixed and/or variable loans. ## Footnote It's important to know the longest period you can fix for.

Question 60

Why is it important to follow up on your loan application?

Answer 60

To ensure that your application is being processed and to check if a valuation has been ordered. ## Footnote Follow-up can help expedite the approval process.