Your 2023 Mortgage Guide

There has been a lot of focus in the media regarding the headwinds being faced by investors and home buyers alike.

Something seasoned investors and advisers are used to however, is using the market conditions to best advantage.

Since January is all about goal setting for the year ahead, let me give you a few tips to help you get the best approval possible, so you can use a bad news market into a good news story for yourself.

The Equity Game

For an investor, lower property prices can be a double edged sword when it comes to buying in a down market.

On the plus side, there is less deposit needed to purchase another property. On the negative, the properties you may be wanting to leverage off may also be dropping, making it harder to pull together the deposit you need.

Hopefully you have listened to the Property Academy Podcast, or my fellow adviser Pete Norris at Catalyst when they talk about split banking.

If you hadn’t, now is the time to start trying to implement it, and fast.

The easiest way to illustrate the importance of split banking really is in a falling market.

If you have a rental property with the same bank as your owner occupier, and the rental falls a further 10% while your owner occupier maintains its value, it’s going to impact your useable equity.

A bank must look at all securities they hold and apply the rules of the time to it (60% max lending on your rental, 80% on your own home at the time of this article).

They combine the securities and lending even if you have them under different entities, purchased at different times, or have different splits allocated by your accountant.

If your rental property and mortgage is safely with another bank, then your owner occupier can have lending increased without the dip in value on the rental impacting.

It works the same in reverse- say your existing rental is holding strong but your owner occupier is decreasing in value.

Split banking allows you to leverage up on one whilst avoiding the impact of the decrease in value on the other

Some extra admin at set up, or when splitting away now can mean a lot more choice in the future.

Loan Terms

Loan terms are often not top of mind for an investor, as many loans are on interest only.

The background loan term is something I am increasingly seeing impact an investors servicing options, with banks calculating the loan term as principal and interest (P&I) after that interest only period ends.

If you started off with a 30 year loan term and 5 year interest only term, then had that extended for a further 5 years, your background term would be 20 years!

Once a bank starts calculating on your ability to repay lending over 20 years P&I it can start significantly impacting on the new lending you can obtain.

Extending this loan term out, or if your bank won’t approve this, refinancing to another provider and ‘restarting’ the clock can unlock tens of thousands in lending.

It has the added benefit of lessening the repayments in the future should the bank refuse to extend interest only by having a longer P&I term left.

Exploring your options

I used to work for one of the big banks- in fact it’s where I got a great base knowledge for lending.

That being said, I cannot describe how FURIOUS I was when I left to become a mortgage adviser and realized the sheer difference in banks and the options now available to my clients.

One of the biggest myths in finance is that ‘all banks are the same’ which couldn’t be further from the truth.

For an investor, these idiosyncrasies could be the difference between picking up a great property at a low price, and waiting years to be approved and buying once prices have rebounded.

Banks have wildly different ways of assessing overtime and bonuses, of scaling rent received, of adding in costs, inclusion of benefits, business income, test rates, boarders or a hundred other things. Then to make it even more fun, these policies and test rates change constantly. That’s why it’s so important that you’re seeking advice from people who are in the thick of it all day, every day, rather than Uncle Lester at the family BBQ.

Exploring your options also feeds in beautifully to my split banking plea above, and protecting you so that not just the next property, but all the ones after are within closer reach.