Research shows bank loyalty is misguided

The royal inquiry into the banking and superannuation industries is well under way and is already producing plenty of juicy headlines.

Over the past week, various reports had indicated that the Big Banks may have favoured profits over consumer protection

Productivity Commission report earlier this year also has found that banks didn’t hesitate to reprice investment loans under the guise of adhering to APRA lending restrictions.

 Those loan increases – for all new and existing investor as well as interest-only customers – reportedly tipped multi-millions into bank coffers.

While more salacious details are likely in the months ahead, there has been one very important insight thus far if you ask me.

According to the Productivity Commission report, one in two customers has remained loyal to their first-ever bank.

However, in return for their loyalty, customers have been “ripe for exploitation”, such as paying higher rates for investment loans that they may have held for years or decades.

Plus, the report said that only one in three have considered switching banks in the past two years, accepting interest rates on home loans up to 0.4 per cent higher than new customers.

Take control of your finances

As a professional mortgage broker, some of the practices mentioned above do concern me, but it also highlights that the banking system has changed fundamentally.

What I mean by that is the days of banking with one lender your whole life is not necessarily the best wealth creation strategy.

You see, financial success is all about maintaining control over your finances so having all your money eggs in one lender basket means that they probably have more control than you.

This is especially true for borrowers who have cross-collaterised properties all with one lender, which can severely restrict what they can do with their portfolios.

For example, say you want to sell a property, however the value of one of your other properties has reduced.

The bank will want to take a slice of any sales profits before you get any proceeds because they literally hold all the mortgage keys.
With a cross-collaterised portfolio, if you want to buy or sell, the bank will have all of your properties revalued, which could be a bad thing if prices have softened.

That’s why it’s always a good idea to share the finance love.

Lenders want your business and are happy to compete for it.

Most successfully investors have mortgages with a number of different lenders.

Not only does that mean that they retain more control over their portfolio, but they can benefit from different rates of interest.

Educated investors review their portfolios annually and assess whether they should refinance some properties to different lenders to take advantage of what they currently have on offer.      

By doing that, they have more control over their financial futures – and that always has been one of the keys to property investment success.

Why I rentvest with my wife and kids

Here’s the thing: I’ve been rentvesting for three years now and I’m not a 20-something who’s priced out of the market.

In fact, I’m in my 30s, married with kids, and have more than 20 properties in my portfolio.

Homeowners to rent-vestors

Ten years ago we bought a home in Sydney that we lived in for seven years, which we used as collateral to build our investment portfolio.

As our family grew, we needed to upgrade.

We had a choice whether to upgrade our principal place of residence but we would have to stop investing, which just wasn’t an option.

The other more attractive alternative was to continue to grow our portfolio and rent somewhere instead.

Given the yields were dropping in Sydney and the property prices were rising, it just made more financial sense to me to continue to invest in more affordable areas as well as locations with better yields.

The rental property that we live in is probably worth $2 or $3 million today, but our rent is only a fraction of what the mortgage on it would be.

It doesn’t take Einstein to work out which is the better strategy.

It’s not about not being a homeowner – one day

I have a lot of Sydney-based clients who have same dilemma as we once did.

However, they’re not writing off being a homeowner completely.

What they’re opting to do instead is build up their portfolio in more affordable locations now and perhaps sell some down in a few years time to buy into the Sydney market.

In fact, they are temporary renters because it’s a means to an end.

Rent-vestors as an investment strategy isn’t necessarily a forever one.

Given Sydney prices are stabilising, and falling in some areas, then in the middle-term those rent-vestors may become homeowners who also happen to be property investors, too.

For us, we have no plans to become homeowners again anytime soon.

Initially, my wife Mandy, had some hesitations about renting but she’s a total  convert these days.

She was worried about a perceived lack of security as a renter, but what we’ve learned is that landlords just want a stable tenant, who pays the rent on time, and who looks after the property.

Just like we do with our own portfolio of investment properties.

Today, Mandy doesn’t even mind if we have to move to another rental property, which is a big change because we had never even rented until three years ago.

 Attractive numbers 

Rentvesting as an investment strategy works on a number of levels, especially the ability to secure finance as well as maintaining lifestyle while also investing.

Investing in more affordable locations, such as Brisbane as an example, means that you need less of a deposit to secure a loan.

You still can pick up good properties – and I mean houses – in Brisbane around the $400,000 mark, which seems absurd to us Sydneysiders.

When it comes down to it, there are still some old school beliefs about renting.

It takes a mindset shift for a lot of people, especially those from conservative backgrounds or ethnic families like me.

Owning a home is drummed into us from the age of 18 months!

Today, the mindset should be about owning property – not necessarily a “home”.

And if rentvesting is the strategy that enables you to do that, then that’s a very good thing.

I know for us, it has been one of the keys to our financial success so far and will continue to be for the foreseeable future.

3 Tips to Secure Finance in Today’s Lending Climate

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.