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Every investor wants to establish themselves as a good borrower so banks and lenders let them access funds for the growth of their portfolio. It's an easy enough task as long as you maintain good cash flow and manage your debts well, but what happens when you're hit by life-changing events—loss of job, illness, divorce or death?
Rethink Investing’s Son Pham describes a good borrower simply as someone who never misses a repayment and generally avoids bad credit.
Working for a property investing company, Mr Pham noticed that investors are especially keen on maintaining good serviceability to achieve their wealth-creation goals, according to him.
According to the mortgage expert: “If you are an investor, you've got your goals. You know what you want to do and you want to make sure that you can continue that. You don't want to do anything to damage your ability to borrow.”
However, certain life-changing events may affect your long-term plans, including losing your job, divorce and separation, illness in the family or death in the family.
These events will definitely hit your personal finances and, similarly, your ability to access funds for your investments.
Having said that, even if the possibilities are one in a million, Mr Pham strongly encouraged investors and homeowners alike to incorporate these events when planning for their investment journey and discuss them with their mortgage broker in order to minimise the negative effects on themselves and other parties involved.
All of these life-changing events will ultimately affect your health and relationships so the first real step in dealing with them is to look after yourself and discuss the changes with your family and other people who might be able to help.
Within the next few months, sort out your finances. Determine the savings you have and the expenses you will have to shoulder in the immediate future such as mortgage payments, loans, health care, medicines, car and home maintenance and insurance premiums.
Assuming that you will have limited income for the next few weeks, do your best to limit your savings and access emergency help such as government benefits and entitlements through your superannuation funds and insurer.
It is also advisable to create a new budget based on your changed income and expenses and updating other official financial information.
As you get back up on your feet, discuss the budget shortfall with your lender and settle on repayment arrangements that you can handle despite financial difficulties. If worse comes to worst, consider hardship variations.
If possible, refrain from applying for a new home loan until you are completely recovered from the event.
The bottomline: It will be harder to access funds when your cash flow is limited.
Mr Pham said: “Cash flow is very important. As things happen down the track, this is how banks and lenders know that it’s worthwhile to take on the risk.”
Engaging property professional, particularly mortgage brokers, is strongly recommended to help you navigate your way through the changes in your finances.
Considering the tighter lending regulations, it will be harder to secure financing for property investments, but that does not mean that it would be downright impossible.
After all, banks and lenders make money by lending money so they will always move to attract more borrowers.
According to the mortgage expert: “They're not going to make it too difficult. It's just that the game's changed a little bit. I think what they're waiting to see is just a bit of a decline in the property prices."
"In the long term, I think, they want everyone to move from IO [interest only] to PI [principal and interest] so they can start paying down debt." he highlighted.
If, for some reason, you decided to apply for a home loan and got refused, among the possible reasons would be a default on your credit report, insufficient income in relation to your existing debts and low savings.
According to law, credit providers must always uphold responsible lending. Your application will be refused if they deem that the credit is not suitable for you.
Upon your next loan application, assess your financial situation and take the necessary steps to reduce your debts, build your savings and ultimately improve your cash flow.
Review your credit report, reduce and reorganise your debts, create and stick to a reasonable budget and seek help from professionals to be well-prepared for your application.
You may also consider finding a guarantor or applying for a no- or low-interest loan.
Experts advise investors to take their time in between loan applications because multiple applications within a short period of time will not look good on a credit report.
Moreover, check the interest rate, fees and charges to make sure that you are actually getting the best credit deal that will be suitable to your goals, capabilities and limitations as an investor.
Mr Pham said: “The best way to make sure you're in is to check is yourself. Don't cheat yourself, don't lie to the bank because, then, you get all this debt and you can't service it.”
“The next thing you know, they come off ensuring you can't refinance and you're stuck selling it,” the mortgage expert concluded.
Tune in to Son Pham’s episode on The Smart Property Investment Show to know more dealing with finances, mortgages and serviceability in today’s property market.
This information has been sourced from the Australian Securities and Investments Commission and the Smart Property Investment website.