A questions and answers session on mortgages for business people after the Royal Commission
Are only high interest rates offered when you are borrowing your way out of a business problem?
High interest rate loans are usually a short-term solution which enable you to move on with your life. They may have enabled you to buy your first home or consolidate debt. They should not be a long-term solution and need to be evaluated 1 to 2 years after taking out the loan, once your defaults have been extinguished and your credit score has improved by adhering to your repayment schedule. By showing a good repayment history you can often refinance your mortgage to a standard loan with a lower interest rate.
How does the Royal Banking Commission affect me?
Lending has tightened since the Royal Banking Commission commenced. Lenders appetites have changed, and they have imposed stricter hurdles to overcome.
Banks will assess several key areas before approving your loan:
What is the purpose of the loan?
How much do you want to borrow?
When will the funds be required?
How long do you need to borrow the funds for?
How will the loan be repaid?
What is the risk to the lender?
Serviceability – can I repay my loan commitments without causing financial hardship?
No imminent changes to my current circumstances
Loan to Valuation Ratio
Location and size of your Property you own or wish to buy
Can I get a loan if I am an ex – bankrupt or have had a failed business in the past?
Bankruptcy can stay on your credit file for up to seven years, but this doesn’t have to stop you from getting a home loan. There are now a range of specialist lenders willing to offer home loans, some of which will consider borrowers who have been discharged from bankruptcy or who have had a failed business in the past.
Will a bank listen to my story?
Yes, they will. We live in a world with a high divorce rate, critical illnesses, redundancies, and failed businesses. These life events can impact your credit rating. Speak with your lender, explain the circumstances and that they are unlikely to occur again. See what they can do for you.
Should I be reassessing my loan every few years like I do for insurance premiums?
Yes. Interest rates and new lending products are released weekly. You need to compare what you currently have versus what your needs are now. i.e. I want a loan with a lower interest rate or I want a loan with an offset account. Speak with your lender and negotiate your current terms after doing some research on what is available in the market. Don’t discount your relationship with your lender. If you aren’t happy, speak up, if there is no change find a lender who wants to have good relationship with you and have you as a long-term client.
Can I draw equity from my property to consolidate my debts or pay my ATO bill?
There are lenders who will allow you to draw equity from your home to consolidate debts and/or pay your ATO arrears. Consolidating your debts makes sense.
1) You are not paying high interest costs like you would be on your credit card, and don’t forget the ATO interest rate of about 9% compounded – OUCH!
2) You lower your chances on defaulting on your repayments which will affect your credit rating and
3) It assists with managing your repayments – one loan rather than several loans
What paper work do I need to get a loan or have my mortgage re-evaluated or refinanced?
This varies on whether you are a PAYG or self-employed. Speak with your bank or lending specialist to assist you.
Why can’t I get a loan based on the advertised bank rates?
This may be due to a number of reasons some of which include:
Credit rating, which all lenders take into consideration now
Previous defaults on mortgage or other loans/credit cards/utility bills
You don’t pass the serviceability test. When assessing the serviceability of an applicant to meet the repayments of a loan lenders apply between 7.25% and 7.5% as a standard interest. This allows for ‘interest bracket creeps’, and hence determined at the time of the application if the client will still be in a position to repay their mortgage if interest rates go up, without suffering ‘financial hardship’.
Your employment and income has been unstable over the past few years.
You are living the high life – lenders take into consideration your monthly ‘living expenses’. Help give yourself the best chance and cut down on things you really don’t need. i.e. Pay TV, expensive holidays, look for cheaper health insurance, utility providers etc.
Parting Note – borrow within your means, don’t try and keep up with the ‘Jones’ by having a milestone around your neck in the form of a huge loan just so you can live in a ‘ritzy suburb’ to improve your social standing. Plan for the ‘what ifs’ in life like divorce, illness or business failure and don’t miss a payment on your rent or mortgage. Missing payments and failing to repay your loans can have serious financial consequences both now and, in the future, and can damage your credit rating for many years.
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