Considering the tighter lending regulations nowadays, first-time property investors are finding it harder to secure financing for their first purchase. How can budding investors overcome lending constraints?
Home loan applications determine whether an aspiring investor is ready to begin their wealth-creation journey or not. Qualify for a mortgage and you have basically opened the door for investment opportunities across multiple markets.
However, certain changes in the property investment landscape have made it harder for all investors to finance the growth of their portfolio—even those who have already established a significant asset base.
According to mortgage expert John Manciamelli, lending interventions by the Australian Prudential Regulation Authority (APRA) as well as the effects of the ongoing Royal Commission has significantly altered the lending environment.
Nowadays, lifestyle spendings such as gym memberships and mobile subscriptions are part of the lending criteria that most banks and independent lenders use.
“Right now, if you've got a gym membership, if you've got Netflix, if you've got daycare, and all of that's showing up on your bank statements, that's going to be added to your living expenses. It’s all about genuine serviceability,” he said.
While first-time investors are bearing the brunt of the more conservative lending environment, Mr Manciamelli shares three tips that could fast-track their entry to the property market:
As investment lending becomes harder, family equity begins to rise across markets.
Simply, this is when a family member assists an aspiring investor in their first purchase by acting as a guarantor and establishing a second mortgage behind their current loan or using the equity on their existing property as a guarantee.
Mr Manciamelli said: “If mom and dad have got some equity, that's a really, really good way to start. Your mom and dad provide the equity and you can borrow 100 per cent, then all you do is put whatever savings you got in your offset account.”
While there are different types of guarantees for first-time buyers, usually covering the entire amount of the loan, experts strongly advise sticking to a limited guarantee in order to minimise the risk for the guarantor as they may be liable for your home loan should you default.
Budding investors are also encouraged to pay attention to their credit cards. They can either lower the credit limits or get rid of their credit cards entirely.
Since banks and lenders are looking for genuine serviceability, having genuine savings would play a big role in the approval of mortgage applications.
According to Mr Manciamelli: “Banks don't care how much you owe. It's actually what the limit is that catches people out.”
“We had clients coming in and saying they were rejected. All I did was look at the credit card limit and upon seeing a $40,000-limit, I went, ‘Just get it down to five.’ Guess what? The banks pushed them up.
“It's cheeky. It's really cheeky, but it is a good point. You might only owe $5,000 on it, but if you got the $40,000-limit, that’s what they really take into account,” the mortgage expert highlighted.
Finally, first-time investors would do well to seek properties with high yield first in order to maintain good cash flow and serviceability.
“It doesn't have to be a capital city-play. Might be a little bit more regional play.Coast, for example, has a good yield percentage. You know that might be something to look at,” Mr Manciamelli said.
As investors go along their wealth-creation journey, they can start to chase growth properties to diversify and ultimately balance their portfolio.
At the end of the day, the current lending environment will require discipline from investors, both new and old.
Aspiring investors who have a ‘very high lifestyle’ backed by an incredible income could still have their mortgage application rejected if the bank or independent lender could not make sense of their lifestyle choices, according to Mr Manciamelli.
The mortgage expert shared: “I had a wonderful client, a U.K. resident earning incredible money, like somewhere between $500,000 and $400,000 the previous year, and he had $300,000 in savings.”
“We suggested buying two investment properties. Four months it took to get through. Why? Because the bank statements that we sent through had these incredibly big withdrawals. Each of the banks said, ‘Why did you take out $6,000 here? Why did you take our $4,000 there?’ We never saw that before.
“There's this new paradigm where you not only just present your income and your expenses like payslips, but also you really need to make sure that you can demonstrate that your lifestyle is one that can afford the lending,” he added.
Truly, old-fashioned saving and financial discipline can build up an investor’s profile that is going to appeal to banks and lenders.
Tune in to John Manciamelli's episode on the Smart Property Investment Show to know more about the different ways to get finance approved in today's tightening lending environment.