By Carly Crutchfield
In all my property deals, finance was the essential component that made the deals possible, it's not always easy to get the right finance structure, but with the right guidance it can be very easy and it could be the difference between saving hundreds of dollars and making hundreds of thousands.
If you are purchasing property or looking to refinance your existing loans, you may have experienced difficulty or delays with obtaining finance, or you may have found it hard to get the right advice or knowledge from your financier on what are the best products, rates or finance structures to suit your purposes.
With the drop in property prices, coupled with the drop in interest rates and the new increased First Home Owners Grant, so many people are flocking to the market to either snap up a property bargain or refinance their existing loans to a better rate or loan product.
This means the banking and finance sector is over saturated with new finance applications, which has resulted in many people waiting for weeks and even months to receive finance approval. They may also have lost the properties they were supposed to purchase because their finance was not ready in time.
Getting finance is the key to building your asset base in property. You need to have the money, or know how to get the money to be able to do any sort of investing; preferably it's about using as little of your own funds as possible and using the bank's or other people's money as much as possible. But how do we know which is the best deal for our specific situations? What if we don't have the time to do all the legwork and research ourselves? The solution is easy and pretty straightforward: hire someone to do all the research for you. It's cheaper than you think and the bank pays the brokers.
Some people think that if you go direct to the bank you will get a better deal than going through a broker. However, you may end up with a loan that really isn't the best for you.
If you go direct to a bank they will only be able to show you the products they have. There are literally dozens of lenders in Australia with hundreds of different mortgage and loan products. By the time you learn all about them, new ones have been brought out and interest rates, bonuses, penalties etc., have changed. Unless you work in the industry day in and day out, you just can't keep up with the best available products for each scenario, and even then only the good mortgage brokers keep up.
In all my property deals, getting finance was the lynchpin that would make or break the deal. I learnt early on in the piece that I wasn't going to be able to handle this process on my own. I started using brokers many years ago to help me do my deals.
So I thought that getting a few tips on how to get your finance applications approved would be extremely valuable, so I cornered Yza (pronounced Eeeza) Canja, a young, dynamic, investor to ask a few questions for you.
Yza started at the age of 22 as a data entry clerk at Aussie Home Loans on a wage of $27K. She has no savings, and was actually in debt. She was so determined to become a property investor that she immersed herself in study, self-development courses, analysing the finance systems and how loans are approved within the finance institutions. Within six months of intense study and analysis, Yza purchased her first five properties with none of her own money, all while she still had no savings and an income of $27K.
Carly Crutchfield (CC): Is it dangerous to borrow money for property purchases during this credit crisis?
Yza Canja: Absolutely, but only for those that don't have the right advice. You need to be more meticulous and careful about how and where you are going to get your borrowed funds from. The banks are being careful about who they lend to, but I think that you should also be careful about who you borrow from. No one has a crystal ball, but with a bit of knowledge you could make some calculated decisions.
In the last 18 months we have seen several lenders drop out of the mortgage market... and people who have loans with those particular lenders have found it difficult to either refinance or get new finance for other purchases due to the much higher rates or restrictive loan structures their existing loans have.
With the right advice you will learn how to extend your borrowing capacities in a market that is contracting, you will learn how to mitigate your risks; a strategy will be formed to give you flexibility.
I find that one of the things most people lack when they start getting finance for property, is their exit strategy; getting in is easy, but without the right strategy getting out could cost you tens of thousands of dollars.
CC: Do you have any advice on how to get finance in this market?
YC: Speak to an expert who will work with you in assessing your overall finance situation before you start applying for any loan. These experts can make suggestions to improve your current situation straight away that will in turn influence your borrowing capacity. Sometimes, by making small changes to your existing circumstances, i.e. reducing a credit card limit, changing the structure of any existing loans, can add tens of thousands of dollars to your borrowing capacity. If you are aware of your financial strengths and weaknesses first, then you will be able to present a hole-proof application to the lenders.
When possible explore using non-bank lenders or smaller banks. Most banks are swamped with loan applications at the moment and because they have so much business they are able to pick and choose from the stronger applications rather than first come first serve. Non-bank lenders are not as busy and are more flexible with their credit policies. In many cases their rates are slightly higher than the major banks, however it's well worth it if it enables you to get the right deal.
CC: How do we get the lowest interest rate?
YC: Shopping for the lowest interest rate should not be the most important criteria when shopping for a loan. Most of the time getting you the best loan structure and strategy can earn you more wealth and save you more on fees. Reasonable low rates are definitely important but they do not always result in more wealth. If you need to pay a slightly higher rate that will enable you to get a good property purchase, it can work out better for you than having to pay more fees, with high exit costs on a low rate loan.
CC: When should we fix our interest rates?
YC: Fixing rates should not necessarily occur when the fixed rates are low, fix when the cash flow works. If you are a home owner, you should only fix your rates at a point when your current repayments are comfortable enough for you to maintain the repayments and continue to make regular savings of at least 10% of your income at the same time. If you are a property investor, you should consider fixing the rates when the rental income covers the mortgage repayments. Don't hang out waiting for fixed interest rates to keep dropping. Do fix at a point when, even if your rental income does not cover your whole mortgage repayments, you are still able to comfortably afford the monthly shortfall and continue saving at least 10% of your income.
Yza Canja now heads up CMONEY, a finance solutions and mortgage broking firm which is a subsidiary of Carly Crutchfield's CCORP. To find out more about Yza and CMoney go to www.cmoney.com.au
