By Phil Ringuet
Whether you’re growing your business, maintaining your working capital cycle or upgrading your family home the lending landscape is rapidly changing and it is now more important than ever to be fit and ready when applying for finance.
Here’s our tips to help improve the outcome of your application.
Understand your living expenses
Both the regulators and the banks have concerns that borrowers have been significantly understating their living expenses and total liabilities leaving them exposed to unexpected changes. This has seen the banks change the way in which they determine living expenses, in particular they are drilling down in up to 13 key fields which include – Education, Recreation, Medical, Clothing, Rent, Transport, Communications, Owner Occupied and Investment, Childcare, insurance and other.
By understanding these living expenses, it gives the banks a strong indication of your capacity to make your repayments along with your character, in particular your ability to manage these items and to save. Preparing a household budget, identifying any one off expenses and reigning in any unnecessary expenditure at least 3 months out from your application may significantly improve your borrowing capacity.
Beware the buffer
When reviewing your current lending facilities including credit cards, home loans, asset finance and other business lending be aware that the banks will always add a buffer to your current rates to protect against rates rises and unforeseen shocks to the market. As an example of a home loan with a current rate of 3.99% the bank may assess this facility at 7.25% or higher to ascertain affordability. Credit cards should also form a part of your consideration as the limits are reviewed not the balances and a rate of up to 36% may be applied.
Reducing your overall credit limits or consolidating your smaller debts into one may not only provide simplicity and a cost saving but improve your borrowing power.
Get the right product and features
The amount you can borrow may also be determined by your loan type and term. Whilst an interest only facility may provide for an upfront reprieve or even fit nicely into your tax strategy it’s important to consider how this can affect your affordability. A borrow who elects a Principal and interest term from the outset may significantly improve their capacity to borrow and here’s why.
If you were to choose a 30 year term with 5 years interest only it’s important to understand that the banks will view that you are paying your loan off over a 25 year period rather than a 30 year period as you will not make any principal reductions in your first 5 years and in turn places pressure on your cashflow over the remaining term.
Some residential lenders may also allow for 40 year terms and commercial funders up to 25 years even against a commercial assets. This can ultimately increase your cash flows just by getting the term and product right.
An Important Message
While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents. Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.