So, you’re thinking about buying a house. Congratulations! This is a huge accomplishment. Before you start touring homes and falling in love with granite countertops, you need to make sure you’re financially ready to take on a mortgage. In episode #1 of the Our Property Development Journey podcast, Brett Mansfield and I talk through what you need to know.
Brett has an extensive background in the financial services industry going back over 20 years, with roles including:
- Manager for professional and executive banking at Westpac
- Head of Mortgage Management at ING
- National Operations Manager at Professional Lenders Association of Australia
- And currently CEO and Director at Buyers Choice Home Loan Advisory Service
Brett is also an active property investor, who has been investing in real estate since the 1980s. He has gone through some good times and bad times with his investments, including the peak interest rate of 17%.
Today, he continues to invest and is one of those investors who buys and holds. He buys a property and sticks the title in the bottom drawer until it becomes cash flow positive. Once it does, he uses it to gear up again.
Let’s hear what he has to say…
Brett, how do people know if they’re financially ready?
(Brett) “I think the starting point for everyone is just to do your budget, to understand your own numbers. To understand what you can comfortably afford, because the bank may lend you a completely different amount and it may even be more than you’re comfortable with. Now with brokers, which is my space and your space, Chris. We have a duty to our clients to not put them into financial hardship. So, the budget is the best place to start.”
Some people mistakenly believe they can afford a home loan because they use a loan calculator on the Internet. However, the approval process for obtaining a mortgage loan is more complex than simply plugging numbers into a calculator.
(Brett) “They’re great tools and there’s no reason to not use those tools because they will give you a guide. Where it becomes important is to seek expert advice from your broker is being able to apply those learnings from Google to your own personal situation, with the benefit of the experience that the broker has and what they can deliver. A broker can have a look at it and can give you some specific advice around your situation rather than the general advice that you get from Google. Also, every lender has their own policy on who they’ll lend to and how they’ll lend money to them. So, if you walk into your bank and they’ll tell you what they can do, but if you go to your broker, they’ll go look we’ve got 40 plus lenders. They will have a look and see where your options sit.”
Let’s take a look at the scenario when someone’s got a lot of equity, or they’ve got a large enough deposit. Perhaps they got it from an inheritance or a gift but they’re still not servicing for a loan. What are some of the things that can put them in that situation?
(Brett) “It can be difficult in that situation, equity is just one of those components, serviceability is another and credit history is another. Of course, people have to have a suitable credit history for a lender to consider them.
Now, fortunately because we’ve got such a broad range of lenders in the market today, there are lenders that play in certain niches. So, there are lenders that will look at clients that have got potentially issues with their credit history. There are lenders that look at clients that are self-employed and don’t have the financials to show that. Maybe their cash flows out of sync with their net profit. So, it’s just understanding where those options exist.”
Before you touched on making sure people can service their loans, and having equity is certainly one part of that. Being able to service the loan as you mentioned is another factor, I think the misconception is that, if you have equity and you get into trouble, the bank can just have my house but that’s not the case either. Is it?
(Brett) “No, it’s not.”
So, when we’re not able to service the loan, it is not like movies where the bank just goes ahead with foreclosure, and you can simply walk away easily, here in Australia the bank still comes after you for what you owe.
(Brett) “Absolutely. Brokers have a duty of care to their clients, it’s under the best interest duty. Banks have a duty of care as well. As you were saying the US, back in the GFC they called it jingle mail where keys were just posted back. That doesn’t happen here, we don’t have that option. The borrowers’ obligations here in Australia are different but that actually protected our system at the time and that continues today. In fact, the bar has been raised higher since with ongoing regulations.”
Many self-employed people can have good cashflow in the business but a low taxable income. So, when we go to the lender, we’re not really showing a good serviceability. Is there another way around that?
(Brett) “Yeah. Look there certainly are. Your net profit will deliver a certain picture of the business and your tax returns and your financials the other picture, particularly in fast growing businesses or reasonably new businesses. And your business activity statements to see where that growth is because your tax returns are such a dated piece of information. Your business’ accountant will have a much better view on how the business is tracking. So, you can use more recent and relevant information and some lenders will absolutely consider those. What you may find is that your loan to value ratio (LVR), so the amount you borrow compared to the value of your security or your property is a bit lower. Because the banks are building in a bit of a security buffer, but absolutely there’s options there.”
So, the lenders are looking at it as a somewhat of a risk because you’re in business and anyone in business is going to know they’re managing risk. But you have cash flow, so we can look at your financials of the business to help justify your ability to service the loan, and this is something that we’ll often do with clients is go straight to the accountant. So, with your permission we can talk directly with your accountant, and we can pull that information in while keeping you in the loop of what that looks like and see what your serviceability options are.
(Brett) “Absolutely”
So, what if we’ve gone through this process, but yet we’re finding we’re still not quite ready, either from a serviceability or from an equity position. What do we do?
(Brett) “Well, depending on the situation and what the gap is. Speaking to your broker and understanding where that gap is and what needs to be achieved and then putting a plan in place to get there.
And then of course you’ve got individuals who are looking to buy a home to live in, if they can’t buy something in the suburb that they want to live in because the prices are too high and they don’t have the capacity, maybe look to live where they want to live and rent but buy an investment property somewhere where they can afford. And so, there’s different tactics that people can consider entering into the market as first home buyers.”
So, talking to the broker is obviously number one and often I’ve got people that’ll come in and they’ve been waiting a while to build a good savings but in reality, they could have been knocking on the door much sooner. And you know, with the number of lenders that we’re looking at, there’s generally a package to suit nearly everybody. Whether you’ve got a low deposit or a high deposit it’s just a matter of which lender suits your circumstances. So, I guess a good piece of advice is the sooner you talk to your broker the better, and if you’re not ready to buy we can create a plan to help get you ready, so you know where you are in the market.
(Brett) “Absolutely, the need to save 20% deposit, which sometimes we see in the media isn’t necessary, there are products and solutions available that will allow people to borrow to a much higher level of the value of the property. There’s a thing called lenders mortgage insurance, which comes into play there and it’s a higher risk transaction for the bank so, the criteria to get the loan approved can be higher but the options are still there.”
Let’s touch on that lenders mortgage insurance (LMI) for a minute because lenders mortgage insurance is just that, it’s an insurance for the lender that the borrower needs to pay the premium on. So, 80% is pretty much the market industry on where lenders mortgage insurance is required or not. So, if you’ve got a 20% deposit, you’re nearly guaranteed you’re not going to have to pay lenders mortgage insurance, anything less than that 10%, 5% the bank’s going to ask you to pay thousands of dollars in mortgage insurance to protect them if you can’t service the loan.
But for First Home Buyers, there’s a lot of government incentives that will help. So, a 5% deposit (plus purchase costs) is generally a minimum savings requirement that you’re going to need, but sometimes there’s a package where the government will step in, and they will insure the mortgage themselves without you having to pay the mortgage insurance. So, it’s really just a matter of talking to the broker and understanding your options.
(Brett) “I’m really pleased you brought that up Chris, that’s a really great point. There are a number of different government incentives for first home buyers and those incentives actually vary state to state as well because state governments also have their own packages. So really important to know what you are entitled to receive, it can make a massive difference.”
What’s the difference between what we’re going to get from a broker to what we’re going to get from a bank?
(Brett) “There is a significant difference and I think people just don’t understand the difference. There’s three real key points here and the first is choice of lenders. The bank can only sell their own products. When you go to a broker you’ve got a choice of multiple options. Your range of choice is significant and it’s not just about the product it’s also the underlying policy on who that lender will provide money too and that’s really important. You could go to your own bank and maybe not have an approval forthcoming but go to a broker and they find a home for you for that loan, just through the different policy. So choice is really significant.
I think the second and a real key point, is service. It’s a bit hard to put metrics around service but, you know I like to think brokers are like the bank managers of the seventies and eighties. They’re the go to, so the broker will know their customer’s name, their circumstances, their situations and look out for them. It’s a long-term relationship. This is not a transaction. It’s a relationship.
The other thing about the service aspect is your banks open certain hours of the weekday, where your broker’s probably going to be working outside of those hours because they’re a business owner. They’ve got skin in the game they’re invested in their customer.
The third real key for me is advice. Brokers are required by law to act in the client’s best interests, a bank is not required to do that, it’s not part of their remit or requirements. And so, what a broker will do is collect information from the client, understand their needs, understand what they’re looking to achieve, their short-term and long-term goals, and prepare a detailed written piece of advice for that client to follow and deliver that advice with all the information the client needs to make an informed decision.
If you think about the professionals and individuals, you should consider having in your life. You need a good doctor, you need a good dentist, if you are self-employed, you definitely should have a good accountant and you may want a financial planner. You should definitely have a mortgage broker.”
In conclusion
The process of buying a house is one that can be quite daunting, especially if you’re a first home buyer. There are many things to consider before purchasing a new home. Remember to do your budget, get pre-approved for a loan before you go looking at houses, and always make sure you have a solid plan in place.
I hope this information helps you in your quest to be a homeowner. If you have any questions, please feel free to contact me.