I’m sure some people think that brokers just select a lender that pays them the most commission right? So let’s bust that myth. First of all the vast majority of lenders pay the same commission, it’s in the range of 0.5% – 0.6% of the settled amount. Interestingly, the lenders that pay 0.6% usually don’t pay any reoccurring income for >12 months. So its swings and roundabouts; no broker is going to get rich by chasing the highest commission.
So how does an experienced property investor’s mortgage broker [or finance strategist as we like to call them] like Trilogy Funding problem solve where your application should be lodged?
It is a process of elimination once the ‘Fact Find’ is done. What is a ‘Fact Find’? This is where we ask you a host of questions uncovering everything from goals and objectives through to the balances on your credit cards. The more we know, the more we can help and the better the advice.
Some typical questions to start the discussion are:
- What are your objectives and reasons for investing in real estate?
- Next three years, what are you looking to achieve?
- What are your longer-term plans post five years?
- What books, seminars have you attended?
- Whose methodologies are you following?
- Then there are all the questions about employment, age, dependents and your existing statement of position.
Together, these questions make up the ‘Fact Find’.
Though these may look like some quick questions to answer, on average we find the discussion around these few questions will go on for ~ 40 – 50 minutes. There is a lot to be found in the answers and a good finance strategist will listen attentively and should also challenge you on some answers.
Now with all the ‘Fact Find’ done it comes down to a process of elimination.
Round One
Collateral – We are going to ask you what you have in mind regarding the purchase and from that we’ll know whether there is a lender or not that would be interested in accepting that as security? Now if it is a standard home in the suburbs of a major capital city then this is a mute point. But let’s say that it’s a residential property in a mining town. It is well documented that this sector is easing, and we’re seeing a softening in valuations and rents. We are also seeing risk ratings in these areas going up too. Not all lenders like mining towns.
That is the first round of eliminations; if you’re buying in the suburbs then all lenders will make it through.
Round Two
Capital – What is your contribution to this transaction?
We will ask you how much you are looking to borrow against the value, also known as the Loan to Value Ratio. Cheekily most people say they want 100% finance and we get that, but in reality the lender is going to want to know how much skin the borrower will have in the deal. Goes without saying a borrower putting in a 40% deposit is less risk to a lender than one who only puts in say 5%.
Side note: The deposit and closing costs can be borrowed out of other property; they do not need to be saved. This allows you to have in essence 105% finance
Second round of eliminations done! The number of lenders that will go onto round three will depend on the funding ratio you need.
Round Three
Capacity – also known as serviceability. This is the ability to repay and evidence that you can carry the new loan. This is where we ask you all about your existing commitments and your revenue streams. Though the reality is most borrowers understand the first two rounds and purchase property that isn’t too quirky, with a decent amount of money in the transaction. It is usually here that many a lender will fall by the wayside, as it is here where lenders have different servicing models that they use. Some examples are external debts assessed as principal and interest or a two percent loading applied to stress test the borrower, or credit cards assessed as being at their limit when you can show you clear them monthly.
So assuming the lenders make it through round three eliminations this leaves the strategist with the task of managing the lender mix.
Round Four
Managing existing exposure levels
Typically the ‘sweet spot’ for most lenders as far as interest rate discounts go, customer service, product mix and flexibility is between $1m and $1.5m. Now that isn’t an absolute, but we often see a borrower at say $2m outstanding with the one lender, have conditions placed on their loans, such as only allowing P&I as opposed to Interest Only, a five year IO term as opposed to ten. So a good strategist will identify that, cross reference with the borrower’s goals and manage this so the borrower can stay as flexible as possible. This will often mean building a new relationship with a new lender back up again to that $1 – 1.5m dollar value.
This will usually eliminate one or two of your current lenders (but not always)
Round Five
Who is offering a good deal? The thing everyone wants up front, give me the best interest rate and stuff the rest…
Sorry to disappoint, but the reality is the interest rate is last on the list, yes – dead last. Let me give you an example… Let’s say a lender was offering you 1% fixed, but you want to give them an old service station as security and you don’t want to contribute anything to the deal. Just to put another nail in the coffin you’re not generating an income anywhere, sorry to disappoint, but the rate won’t even come into it as the loan application won’t even get onto the fax machine. [Yes this was an exaggerated example, but I think you get the idea]
The rate is irrelevant if our deal won’t let any lenders through the previous four elimination rounds.
Now this all said, this is the way a finance strategist problem solves an enquiry, it is not what is said to the lender. So if you come to the table and your deal passes all the hurdles then we will have a nice selection of lenders to choose from. Then of course we’re going to squeeze them for a sweet interest rate, but an experienced strategist will never do that without knowing all the facts. It becomes a waste of everyone’s time.
So I’m hoping you can see why a finance strategist who specialises in multiple property finance is a valuable person to have on your team. They’re typically your first phone call after you spot something on the internet for sale. While they may jump around a little with the conversation probing here and there, it is this process that they follow to deliver you the lender that best fits your objectives.
You also have to remember this can all be done by phone, and if we have your information on file, it can be a very quick conversation with a yes or no outcome. So if you have a purchase on your mind, pick up the phone and call one of my finance strategists on 1300 657 132 or Click HERE to Schedule Your FREE Consultation.
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).