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Thursday, March 26 2015

Credit scoring
It’s possible that your loan could be declined without a human even looking at it. Most lenders use some form of credit scoring and in a number of cases will let a computer decide whether your loan is approved or declined. So if the “Computer says no” then that could be the end of it.

Of course what affects your credit score is a closely guarded secret but over time lenders have let a little bit slip here and there.

Pre-approvals are worthless
Lenders hand out pre-approvals like lollipops but what most won’t tell you is they aren’t worth the piece of paper they are written on. Most pre-approvals do not involve a detailed analysis of your financial information and full verification of your documentation. In many cases they are done over the phone or via email based purely on a few questions.

And don’t even get me started on online loan calculators.

As we discussed in our last newsletter what your income is and what a lender is prepared to use are two different things.

I think the approach most lenders adopt is when someone makes an initial enquiry they just say yes. That way there is a strong likelihood that person will come back to them for their loan if they sign a contract. And the lender gets first shot at it. If the loan is declined or then modified from what they first advised it’s no skin off the lenders nose they just move on to the next deal.  

Lenders want you to fix your loan
Lenders offer fixed rates for one reason only – to stop you from leaving. They are purely a retention strategy.  To break a fixed loan can be incredibly expensive and lenders know hat in 99% cases this break cost will stop you from leaving.

Most fix rate loans also stop you paying off the loan too quickly.

Lenders pay big money to interest rate strategists to work out where rates are heading and where the cycles are. Fixed rates are designed to make you pay a higher cost of funds than if you stayed on variable.

Your chances of winning the bet are very low. If you don’t believe me go and have a look the Big 4’s combined net profit.

Lenders want you to cross-securitise
As with fixed rates lenders know if they tie up all your property it’s going to make it very hard to ever leave. This is particularly an issue for property investors with a portfolio. Each time you add a property it gets added to the mix. It’s very hard to unscramble an egg.

It’s not all about the rate
Lenders know most borrowers focus on the interest rates and pay little attention to all the other costs of the loan. However when you add up other establishment fees, valuations fees, legals, ongoing fees etc suddenly that low rate is no so low anymore.

And then there is the cost of mortgage insurance – this can vary by several thousand dollars between lenders.

You’re too old
Changes to legislation have meant it is more difficult for older applicants to obtain a home loan. Once you are over 50 lenders will ask a lot more questions and make place more restrictive conditions on your loan. 

Valuers dictate the market
It doesn’t matter what you think your property is worth, or the bank. The only person that matters is the valuer. It is now fairly common to see properties come in below contract price or well below owners expectations if they are refinancing. And even if you can provide supporting sales evidence it is unlikely that will change their minds. We are even seeing two valuers be $50000 apart on their figures.

Many lenders acknowledge privately that valuers underscoring properties and being inconsistent in their valuation methods has become an issue and are killing good quality property transactions but no one seems to be prepared to do anything about it

The important this in all this is to get appropriate advice. We work with an extensive range of lenders and are familiar with all their different rules, policies and approaches.

This means when we work with clients we give them a realistic appraisal of their options and ensure that the structure that is put in place is designed to benefit them and not the banks.

Contact us for an initial chat to discuss your home loan requirements

Posted by: Greg Carroll AT 11:35 pm   |  Permalink   |  Email