Coping with tight credit

By Nila Sweeney

The finance sector has changed significantly in the last twelve months, and we're now in an environment where lenders have less interest in risky borrowers, and more interest in rock-solid candidates.

Banks and non-bank lenders alike have tightened their lending practises, confirms Lelsey Wood, General Manager, Australian Loan Company.

"Their appetite for risk has changed significantly," Wood says.

There are many road blocks you might encounter while sourcing a loan in the current market - but there are things you can do to boost your borrower profile and improve your chances of accessing finance.

Low valuations

If your property's valuation comes back much lower than you expected, ask the bank whether an internal inspection was carried out or not.

If they conducted a desk-top or drive by valuation, Wood says they might allow you to get a second opinion.

"What I think people should do in that case is look at the sales in the vicinity of where they want to buy - go to RP Data and look as actual sales prices, not just listing prices, so you know the area really well," Wood says.

"Then, get another valuer to look at the property. If the valuation comes up higher, take all of that information back to the bank and challenge their original finding."

Your lender won't just accept any valuer - you will need to use someone who is part of their accepted panel of valuers, so confirm this with your lender first.

"If you're really feeling that the valuation has come in too low, a discussion with the bank would be appropriate. If you have a broker, they should be doing this for you," Wood explains.

"If you've got a good case, the banks will generally support it - they are there to support you as well, so you can go back and say 'I want you to get a better price for my house'."

If your lender has conducted a full internal valuation, however, you'll need to investigate alternatives.

In that situation, even if you went and arranged another valuation and it came back higher, the banks will take the lower of the two - so you either need to have additional security or a guarantor.

Angelo Benedetti, director of Adelaide-based finance brokerage Oracle Lending Solutions, says banks have ramped up their lending criteria in favour of low-risk borrowers, particularly those that can offer a solid deposit.

"We've seen that a fair bit, where banks are becoming very conservative with the LVRs that they're prepared to offer," Benedetti says.

"They're tightening up across the board, and I think it will remain that way for at least another 12 months, until they see the true impact of what's happening around the globe."

Anything more than an 80% lend is considered high risk in the current market, so Lenders Mortgage Insurance (LMI) premiums are being impacted as a result, he adds. 

"This is because when valuations drop, you're borrowing more as a percentage of the purchase price," Benedetti says.

If your bank is reluctant to offer you a high LVR lend - or they attach a hefty LMI premium to the deal - that is your signal to shop around. Currently, every lender is operating with a different agenda, and some will work harder for your business than others.

Low doc borrowing

Many low documentation loan products have been withdrawn from the market in recent months, so low doc borrowers have fewer options now than they used to.

"A lot of the non-bank lenders have minimised their involvement in the market, and because the banks have increased their stranglehold, consumers have less choice," Benedetti says.

To minimise their exposure, the lenders that do still offer low doc mortgages have increased the lending criteria attached to these products.
"They're looking for things like a reduced LVR, and for higher LVR borrowers, they want more documentation to support it," Wood says.

Most lenders charge Lenders Mortgage Insurance for loans over 60% LVR and they cap the maximum borrowing at 80%.

"Lower LVR borrowers will have no problem getting the loan, there are just not as many low doc loans on offer, although some have started to flow back onto the market."

Low doc borrowers will likely be paying higher interest rates, so if you're considering this type of loan, weigh up whether you believe the extra expense in the short term will be offset by the long term capital growth.

Don't have enough equity?

If you don't have much equity in your current portfolio, there are still ways you can access lending - but first ask yourself, 'is this the right time to be leveraging to a high level?'

"If you've got several properties in your portfolio, the bank is going to look at you more closely," Wood explains.

"If you're an individual with high net worth and you have a number of properties, the lender will likely have no problems - but generally speaking, the banks are being a bit more cautious with highly-leveraged borrowers."

You'll probably need to factor in a higher interest rate and a higher LMI premium, she adds.

"They're tightening so they're not going to be lending as readily to borrowers who have a large portfolio. Generally, the higher the risk, the higher the interest rate, so you might find that you can get the loan, but it will cost you more," she says.

"To be honest, I wouldn't be leveraging to a really high level - people have got to be prudent in this market, and high leveraging could cause you a huge headache in the future."

Bad credit record

The bills that you've paid are important - it might be a couple of years since you've had an issue paying a mobile account or electricity account, but if you've been consistently late paying bills, that could end up "coming back to bite you at the worst possible moment," says Lisa Montgomery, head of marketing and consumer advocacy at Resi Home Loans.

"If you think there's anything that might be suspect or curly in your credit rating, deal with it promptly so you can then take steps to get the information about how that situation occurred," she says.

"I've seen it so many times when someone hasn't brought it up, often because they didn't want their partner to know that they'd had this huge debt or default in the past."

Your application is going to be looked at in totality, Montgomery adds, so your record of repayment, income, and other assets will all come into play.

"The best thing you can do is to be really upfront, open and honest, and present your lender with every opportunity to put that approval letter in front of you," she says.

Even if you do remedy the error and prove that steps have been taken to repay the debt, lenders will still be cautious in the current market, Wood warns.

"They are tightening up in this area big time - even if you've paid out the debt," Wood says.

"In the past if you had a bad credit rating and you paid it out, you could get it removed with proof of payment. They won't do that now; of course, it depends how bad your credit rating is and how big the debt was, but if it was significant, just don't go there."

If you're not sure how your rating will shape up, you can check your personal credit rating through organisations such as Veda Advantage. A free report can be sent to you within 10 days, or you can fast track the application by paying an express processing fee of around $30.

Because lenders have tightened their borrowing criteria in the wake of the sub-prime crisis, it's vital that your loan application presents you as a capable and trustworthy borrower.

You want to give the bank every opportunity to approve your loan, so keeping track of your finances and being able to present all of the information that is required will "pretty much ensure that you'll fast track your application," Montgomery says.

"It's important to have that information handy, so you can easily access six months of credit card statements and your recent payslips when it's requested."

Your lender will take into consideration all aspects of your financial life, from how much you earn and your employment history, to your outgoings, savings history and outstanding debt balances.

"If you have any dependants, any kids, they'll take that into consideration too," Montgomery says.

Because the application process is all about creating confidence in your lender, anything you can do you confirm your position as an honest and competent borrower will impress the banks.

For example, your credit cards can have a huge impact on your borrowing capacity from the bank's perspective.

"When you're going for finance, the lender will calculate not the outstanding balance on your credit or store card, but the limit," says Andrew Rocks, financial planner and director of financial advisory firm the Announcer Group.

"This is because you might have a credit limit of $40,000 with a balance of $5,000, but you could effectively take that money out today and be left with a $40,000 debt."

Rocks suggests that you lower your credit limits to the minimum amount you need, and request that any future automatic or proposed limit increases are cancelled. If possible, you should pay off any extra credit and store cards and cancel them, and keep just one account open.

"You need to make sure that you officially cancel the cards," Rocks says.

"If you pay off the card but don't cancel it, the debt is going to climb right back up again."

Having a structured savings history will help, he adds; "Showing that you've regularly saved over at least a 12-month period is as important as the amount of savings that you've accrued."

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