- Clients wished to purchase a second property to live in that was closer to their daughter’s elite dance school.
- They wanted to retain their current property as an investment property.
- Whilst they had considerable cash reserves, they wanted to protect as much liquidity as possible.
- The incumbent bank had returned a lower-than-needed valuation, limiting the amount of equity that could be “released” to contribute towards the deposit and costs to purchase the next home.
- Also, due to the restricted amount their current bank would lend against their incomes they could not borrow an adequate amount to purchase a suitable family home.
- The incumbent bank was unable to assist further due to their restrictive lending policy.
- Attempts by the clients to overcome these challenges with an online loan supermarket had left them frustrated from what they felt was a lack of knowledge, professionalism and progress on the part of the staff at these companies.
- Close to giving up, they reached out to BH Brown Professional Mortgage Brokers and after countless hours of work, were delivered the result they sought, calling Us “miracle workers”.
Here’s how we did it…
Nathan called me after being a member of our community for a number of months. He went on to tell me that his daughter had a particular gift – dancing.
This is all well and good, the challenge being that the best teacher for their daughter is located north of the Swan River and he and his wife Shar live in their home in Kardinya.
What this meant is his wife Shar is stuck in the car 40-mins each way three times each week and it was beginning to strain an otherwise harmonious vibe in the family.
Initially, I was like “Why don’t you just sell Kardinya and move north closer to the dance school” but it was not nearly as simple as that. And I’ve learned with a family of four it’s never simple.
There was a whole range of other things to consider including the kids’ school, Nate and Shar’s work locations, their family and friends and that they really did love living in Kardinya and were only moving for their daughter’s dance classes which might be for three more years.
They wanted the move to be a short-term move so their daughter could complete her dance classes at that specific studio and then, all things being equal, move back to their current home.
Retaining one property and purchasing another can be quite simple, depending on the scenario. The issue with this particular scenario is that their Kardinya home was bought only a few years prior and they didn’t have a whole lot of equity to release and use for a deposit and to cover stamp duty and costs.
Nate was also quite clear that he didn’t want to dip into his pile of cash unless absolutely necessary.
The second major issue was that their current major bank would not (could not) loan them the money they required because of the way that particular bank calculates and assesses affordability. Given the strong income and low debt position, Nate and Shar rightfully believed that they should be able to borrow more money from another, more generous lender. They also strongly believed their home was worth at least 5% more than the incumbent bank’s valuation.
The overall view of the deal was three separate loans, like this:
- Loan #1 would be the refinance of their current loan and switching that to a fixed, low cost, interest only investment loan.
- Loan #2 , secured against their current property would be used for the deposit and costs to purchase the new property, including stamp duty.
- Loan #3 would be a pre-approval for the balance of the purchase of the new home
They had already sought assistance from their current bank and an online “loan supermarket” (i.e. Lendi, Loans.com.au, Athena), both of which had told them they would have to sell in order to get into a home closer to the dance school.
If you want to buy a property without using cash, here’s the single biggest issue with approaching a bank directly: they have only one internal valuation pathway to value properties. If they outsource the valuation to a third party to get a second “bank valuation” and the outsourced valuation is higher, they will rely on the lowest of the two valuations unless you find yourself dealing with a pro-active internal bank broker and they contest the valuation, which they won’t, because the decisions are seldom overturned.
This sucks because the amount of equity that can be released is based on the valuation of the property.
The property valuation versus the debt secured against that property determines the loan-to-valuation ratio or LVR.
The LVR determines the interest rate or “price” of the debt and also the cost of Lender’s Mortgage Insurance. The lower the LVR the more attractive the terms of the lending. The higher the LVR the more costly or unfavourable.
Therefore, you need some way to obtain a “bank valuation” that is as close to the “market valuation” as possible. The bank valuation will invariably be less than the true market valuation as the bank factors in market risk into their valuations.
What this means is that if you have a mortgage in place with a bank and want to release equity while retaining the lending at that bank, you are stuck with the valuation they offer.
Some banks are known for issuing valuations that are consistently lower than other.
We have a good understanding from which bank we can expect to receive a fair valuation or one closest to a true market valuation. Expect to see a variance of up to 10% which can make or break your plans. If you’re going through this process now, book a call with one of our team to discuss how we might be able to help.
Often, lazy brokers don’t make the effort to order multiple valuations from the lenders that usually instruct full or “walk-through” valuations. Knowing how to maximise the “paper value” of real estate is part of the art of broking (and property development).
By the time Nate came to us he was despondent, and we don’t blame him.
After the initial engagement and compliance paperwork was completed, we immediately set about ordering a number of valuations from our pool of lenders to properly establish the highest bank valuation for their property.
Remember, we have access to around thirty lenders – that’s a very clear benefit.
As expected, there was about 10% variance between the lenders’ valuations – we ordered five – with two of them coming in at the same figure which were much higher than the internal bank valuation given by the incumbent lender and high enough for them to release enough equity to purchase a second home with minimal cash usage. We estimated they required less than $10,000 in cash.
This was the first hurdle cleared. Hanging over the deal was what we call “tight servicing” or restricted affordability. What this means is because of the client’s current income and family situation we didn’t have two full-time incomes to use – only one full-time income and one part-time. To make matters even more complicated a good deal of Nate’s annual income is comprised of bonuses, allowances and overtime.
A brief lesson on how banks work how much you can afford to borrow: Banks apportion different levels of “shading” which is a weighting or percentage reduction in the amount of that income that will actually be used as income to calculate the client’s income available to cover the loan repayments and ultimately maximise the amount of money they can borrow.
We’re not done yet.
Different banks treat rental income in different ways. Different banks treat negative gearing tax benefits in different ways. All banks have different Servicing Calculators which have their own way of working out the combination of income weightings for each individual part of the application.
Think about it:
- Both Nate and Shar’s income is assessed individually and in different components.
- The rental income is assessed.
- The negative gearing component of the interest and other expenses of the investment property are assessed.
- Their current loans such as car and credit cards were assessed.
- A weighting of the kids’ likely expenses and their living expenses is assessed.
- Finally, and very importantly, a “buffer” is added onto the interest rate of the loan that is being proposed.
This buffer is called a “servicing floor”. This single factor can make or break a refinance and varies from lender to lender, and can range from as low as, say, 2.5% above the client’s proposed interest rate up to a fixed percentage which might be as high as 8%. The higher the figure, the less money the client can borrow. Make sense?
If this sounds like a lot of work, well, you’ve got that right – it is. At this stage, we had fully completed two different options with two different lenders.
Of the two banks we had narrowed the choice to, we then drilled down deeper to recommend the lender that had a combination of these factors:
- Best ongoing service
- Lowest cost mortgage insurance
- Lowest application fees
- Lowest ongoing fees
- Lowest ongoing interest rates
- The application processing times of each bank
- The quality and competence of their staff in handling applications
- Where the loan will be assessed (i.e. is their team in Australia or overseas?)
- Aiding this decision process for us is the “insider knowledge” of the view the individual bank’s Credit Assessment Team will view the loan application based on our considerable experience with each of them. (If you are trying to do this yourself, how can you expect to know this very important information?)
By the time we had completed the assessment phase of this deal we were at least a few weeks and more than fifteen hours of work in – this is another reason why service between brokers can vary.
Who do you know who wants to do fifteen hours of work without being paid? We’ve got a team of Professionals so naturally we commit to the work once we believe we have a solution.
Nate and Shar had to reduce some consumer debt and tidy up some things before the application was made to the chosen lender.
After this was done, our team had pre-filled and pre-completed all of the necessary paperwork to make the application in a way we believed would give them a 99% chance of success.
We offer a “Done For You” service, meaning we literally take full responsibly and control of the transaction right down to pre-filling the application forms for our Clients.
We’ve been told many times that our service is way better than banks’ private wealth or private client service.
Among many other things, we do it this way this because it reduces mistakes and is a big factor in us having a decline rate less than 1%.
A slightly nervous Nate called when he received the application forms to sign via our secure online portal, wanting to know what we thought the chances of success were with the application. My standard response: “We never apply for a loan unless we’re 99% sure it will be approved.”
Look, I’ll be honest with you, getting a deal approved where the overall loan-to-value ratio is 95% with a $26 monthly surplus is not easy.
As a broker you have to get inside the mind of the Credit Assessor and know the Bank Policy as well as they do.
Warning: You must also know the policy of the Mortgage Insurer – but we don’t have the space to discuss that here.
If you’re an investor with multiple properties and you’re doing this yourself, sorry to say, you’re an amateur trying to do the job of a professional and will never achieve the returns you ought to.
Sorry to be blunt, it’s the truth. Professional Mortgage Broking is a skilled craft that takes years and hundreds of loan applications to learn.
After a just a short time, we had a Formal Approval issued from the lender and a couple of elated and slightly shocked Clients.
After being told “no” from so-called experts, sometimes clients aren’t sure they should believe they have the result they were told couldn’t happen.
After I had called Nate and given him the good news, Shar, called and when I answered, said “…is that Brodie the miracle maker?”
I’m not sure I’d go that far. Look, maybe we are the Mortgage Broker Perth people seek out to help them realise their dreams, and we are way more thorough most Mortgage Brokers but more importantly, we are hardworking and persistent.
Oh, and the my company has my name on it – what we do as Mortgage Brokers reflects directly on me and my reputation.
Not long after we had the approvals, I was fielding calls over the weekends from an excited Shar who was charged with the responsibility of locating a new home close to their daughter’s dance school and just a week or so after this, they had an offer accepted and the rest happened smoothly.
It’s hard to overstate how stoked Nate and Shar were. Particularly Shar who had been the dedicated driver shuttling her precious and precocious dancer extraordinaire up and down the freeway a few times each week.
Happy wife, happy life for Nate, who now has a more chilled family life, has the beginnings of a quality property portfolio and has retained the vast bulk of his cash savings for whatever he pleases.
I’ve only covered the major points of this deal, and there was so much more to it, far too much to cover here.
But I think you get the point: You cannot expect to get the results you’re hoping for if you’re dealing directly with a bank, online loan supermarket like Lendi or discount lender like Ubank, Tic Toc, Loans.com.au, or any number of the “here one day, gone the next” start-up flops.
I know first hand how difficult it is to find exceptional Mortgage Brokers in Perth who I trust enough to allow near my clients. It’s not that these other large operators are a bad thing (hey, they make Us look good!), it’s that the talent required to solve complex or challenging situations like this is very thin on the ground and generally they don’t want to work in a loan factory.
Time may prove me wrong, but I firmly believe that demand for the skillset and relationship that Professional Mortgage Brokers provide will remain strong for as long as there are ambitious people in the world like Nate and Shar who are now well on their way to Financial Security and Wealth.
Here’s to your success,