How Lenders Work Out Whether You Can Afford A Loan

Different lenders use different formulas to work out how much you can borrow, but the biggest loan isn’t always the best idea.

Being able to secure your ideal loan amount can seem like a battle of balances. Once you’ve worked your budget and finances through a spreadsheet, there’s still the one issue left to deal with: assessment rates. This is also known as an ‘interest rate buffer’.

Getting in while the going’s good and securing your loan while interest rates are low doesn’t change the fact that lenders are compelled to ensure that you will be able to make repayments if interest rates fluctuate.

Matching the features of a loan to your financial position is important, and often requires a third-party expert to help guide you through.

“What is very important is that people understand the ramifications of exposing themselves to debt,” says Andrew Crossley, Homeloans Business Development Manager and best-selling author of Property Investing Made Simple.

“When modelling costs, an adviser would be wise to be very conservative in the figures they are using.”

Assessment rates add a margin to the variable or fixed interest rate of your loan. The assessment rate provides added protection that you will be able to repay your loan when interest rates rise, because they are sure to rise and fall throughout the life of your loan.

“APRA is clamping down on lenders exposing people to too much debt and not preparing them for interest rates as well as they could have,” Crossley says.

The assessment rate can be anything from 1.5-2% above the variable rate, depending on the lender, and many are currently using rates of approximately 7-8%. Mortgage assessment rates vary from lender to lender, which is why different lenders may offer people in the same financial situation different loan amounts.

In some cases, the difference in loan amounts offered by different lenders can go into tens of thousands of dollars, but the biggest loan isn’t always the most suitable. Ensuring that you can pay your loan, whether rates stay low or rise, requires a bit of know-how. Speak to Pauline @ Pride Mortgage Services  to find out more.

Do You Need A Finance Broker Or A Financial Planner?

When taking the plunge into the world of home loans and property investment, the challenge often lies in knowing which expert to approach for help. Mortgage brokers and financial planners, although similar in their professional outlook, cater to different financial endeavours.

Mortgage brokers are qualified and must be either licensed or appointed to act as loan advisers. They have in-depth knowledge of loans and options suitable for a range of different financial situations. They negotiate with lenders to arrange loans and help manage the process through to settlement.

 “When it comes to talking about a client’s debt structure or interest rates, or the best way to set up a loan, it’s really something that needs to be done by a mortgage broker who is qualified to give credit advice,” says Luke Mellar, a lending specialist at Shadforth Financial Group.

Financial planners, meanwhile, assist with anticipating and managing longstanding financial outlook. They help sort through and select options for investment and insurance, with attention paid to retirement planning, estate planning and investment analysis.

“Planners take care of more of the long-term, wealth-creation strategy, as well as super and life insurance, and other sorts of wealth protection insurances,” Mellar says.

A financial planner’s work is wide-reaching and important to your long-term financial health and stability, options relating to loans and refinancing can only be recommended by a qualified broker authorised to do so.

There are some situations where it would be best to include both types of financial professional. For instance, if your broker is helping you refinance your loans in order to undertake a financial investment, a financial planner can step in to assess the best investment option for you.

“There is rarely a time when I am dealing with a client, just on the loan side of things, where I’m not thinking about how it fits with what the financial planner is talking about,” Mellar explains.

“In terms of whether the client’s choice is a viable investment strategy or whether it fits in with their long-term wealth goals, that’s something that we absolutely have to refer back to the planner to make sure that it fits in with their broader plan.”

The answer? It depends on your situation – for loans, see a broker, for investment advice, a financial planner. Of course, your broker can always refer you to a planner if you need one.

Contact us today to find out how we can help you secure property or commercial finance.

Why paying off your credit cards is not enough

Getting your mortgage application together can require quite a bit of financial scrutiny. In order to figure out your serviceability, your potential lender will look deeply into your finances.

It’s a no brainer to take your credit card debts into consideration when applying for a mortgage. But what many people do not realise is that high credit card limits will not bode well for a home loan application.

If you have a high credit limit, you also have a high debt risk in the eyes of your lender. As the logic goes, there is no stopping you from boosting your credit card limit the day after your loan is approved.

“We have to take account of 3% of the total credit card limit, regardless of what the applicant owes,” says Homeloans Ltd BDM Sally Carmichael.

“If they had a $10,000 limit but they only owe $1000, we still have to assess $300 a month and that comes directly out of their liability. It does make quite a difference.”

Even if you haven’t put a cent on your credit card for the past five years, a high credit limit will negatively affect your serviceability. The best thing you can do is lower your credit limit, or cancel that credit account entirely.

“You need to pay out your credit cards and avoid having any other debt,” says Carmichael. “You need to be able to use your full amount of income.”

For those that have to pay off their credit account before dreaming of cancelling their liability, it is imperative that you pay your debt on time, according to your minimum repayments.

The first step towards finding your new home is speaking to us today to help to sort out your finances.