There is plenty of media about the tough lending environment at present.
Lenders have certainly upped the ante when it comes assessing loan applications but that doesn’t mean that all hope is lost.
In fact, banks are in the business of lending money and their doors are still open.
That said, here are my top three tips to secure finance today.
1. Improving your income
This tip is always tricky because it’s not like you can go out and improve your income overnight.
However, over the longer term, this can be achieved.
If you’re considering growing your portfolio or upgrading in the future, then you have time to increase your income.
This can either be through focusing on obtaining a promotion, taking a second job or even starting a small business on the side.
Whichever way you achieve it, if borrowers focus on that it is probably one of the most important factors that can improve their serviceability.
So, if you’re thinking of investing at the end of this year or next year, now is the time to start thinking of increasing your income.
Couple that with the fact that lending restrictions will eventually be wound back, having a higher income will be the main attribute that supercharges your lending capacity in the years ahead.
Whenever I mention this to my clients, though, they often question how achievable it really is.
The thing to remember is that improving your income, as well as successful property investment, are both long-term plays.
2. Reduce your Consumer Debt
The next tip is reducing your consumer debt, which includes novated leases, car and personal loans, as well as high credit card limits.
Lenders assess the limits on your credit cards, rather than the balance, so you may as well reduce those limits to improve your serviceability.
All of these debts impact your ability to borrow because of the reduction of your cash flow every month.
If you’re unable to reduce your consumer debt drastically, then another strategy is to consolidate it into one loan, preferably with a lower interest rate.
Some people in Sydney and Melbourne, for example, have consolidated their debt into their home loans because of the equity they have from the recent strong market conditions.
Whether you consolidate this way, or into a new personal loan with a low-interest rate, then your monthly repayments will likely reduce which improves your serviceability.
I had a client recently who saved thousands of dollars a month on repayments by undertaking this strategy.
3. Consider smaller lenders
About three or four years ago, we were probably submitting about 10 to 15 per cent of our loans to smaller, or third-tier, lenders.
Now it is probably closer to 35 to 40 per cent.
The reason for this is that major banks and mainstream lenders are under so much scrutiny and pressure their appetite for residential lending has reduced.
They have tightened their policies to the point that there are a number of non-bank lenders that are soaking up market share in a big way in a small amount of time.
That’s because they don’t have the same constraints and they have other sources of funding as well.
Previously, borrowers were put off by these lenders because of their interest rates, fees and terms.
Now, though, these smaller lenders are pricing their loans competitively and are winning business because of it.
Even if the interest rate is slightly higher than one of the majors, it’s important to understand the opportunity cost if you were unable to secure a loan at all.
Also, these smaller lenders are often boutique, meaning that they are targeting specific types of borrowers such as the self-employed.
There’s no doubt that the lending environment has changed drastically over the past two to three years, but people always need to buy and sell regardless of what the market or the banks are doing.
And that means that banks – big and small – remain are open for business as long as you present a strong application, which every borrower should do every time anyway.