Is Your Property Portfolio Squeezed By The Credit Crunch?

We ask Paul Ransley of Finding Finance to explain the "Credit Crunch" and ask if anything can be done to get around it.

What exactly is the “Credit Crunch”, or “Credit Squeeze”? How did it come about?

For many Australians the credit squeeze means that people who, 18 months ago, could  obtain a loan relatively easily, now find significant, but not insurmountable, barriers blocking their way.

How did it come about?  20/20 vision is a wonderful thing, but you can blame the usual suspects: Greed, stupidity, poor oversight and a boom in asset prices underpinned by high debt - a recipe for disaster.

When the ugly lending practices occurring in the United States were finally exposed the world’s financial markets went into a tailspin and suddenly the money flowing through the system dried up.

While Australian lenders were more conservative than their US and European counterparts,  we’ve all had to pay the price.

What does it mean for property investors – or any property purchaser - in Australia?

There is money available for lending.   Probably more than you think, but because the banks are running scared they are not going to give it away as readily as they once did.

There is also less competition.  Many non-bank lenders have fled the market which means the big banks hold the whip hand and they only want “rolled-gold” customers.

Low doc borrowers, who once simply signed a declaration of income without having to provide evidence, are now being asked for 12 months of business activity statements.

Banks have reduced how much they will lend on properties.   Some lenders once allowed you to borrow up to 105% of the purchase price. Many have pulled their maximum lending back to 90% loan to value ratio  and the qualification criteria is much stricter.

Few lenders will refinance investment debt from another lender at more than 90% LVR.  Where a refinance is involved lenders are demanding six months of loan statements to demonstrate good conduct.   The mere hint of a late payment will often see an application rejected.

At the higher LVR’s most banks now require borrowers to provide evidence of “genuine savings”.   It can be between 3% and 5% of the purchase price.  That means you have to have savings, or equity in other property for at least 3 months.

Some banks now require detailed accounting of a borrower’s living expenses, whereas before they were happy to simply apply a formularized amount based on family size.

There are plenty more changes, but I guess you get the message.
There is now a huge variation in lending policy between banks.

Some will only lend to 90% LVR, some will lend to 95%.
Some require B.A.S, others do not.
Some require 6 months statements, some only 3.
Some require evidence of genuine savings, some do not.

Borrowers need to select their lenders carefully.

My salary has gone up, my rents have gone up and interest rates have gone down.  Won’t I look better to a lender now and be able to get a better deal, or borrow more?

The twin spectres of recession and unemployment mean that lender’s are looking very closely at borrowers.  They are assuming the worst:  That you will lose your job, won’t be able to pay your debts and property values will drop.   While lower interest rates mean you should be able to borrow more, the fact is that lender’s have increased the interest rate at which they assess loans.  It is between 1.5% and 2% higher than the actual rate.

However, if you have . . .

·    Steady, long-term employment
·    A 20% deposit
·    The capacity to meet mortgage repayments at a rate 2%
     higher than the prevailing interest rate
·    An unblemished credit history
·    You are buying in your own name
·    The valuation of the property you are buying reflects the
     purchase price

                                         . . . the banks will like you.

Some lenders have changed their policy for lending to company/trust structures.  What they want to see is a direct connection between the owner of the property, the borrowing entity, the directors of the company and the beneficiaries of the trust.

Paperwork is paramount.

I want to keep investing, but I can’t borrow any money – is there anything I can do?

Think about finding a partner and forming a joint venture.

Sometimes the best joint venture is one between parties  who have complementary skills and resources - i.e. one or more parties has time and ability, others have the funds to contribute to the project.

It might be that one party holds a development property, but cannot access the funds to do the development/construction.  A JV with an equity partner (i.e. someone who can access the development/construction funds) or a builder looking for a project, could be a profitable approach.

But a word of warning:  Get all the agreements and details of roles and responsibilities in place and checked by a solicitor before you start down this path.

Also, if you are borrowing some of the money you will be judged to be liable for the total loan amount.  This is called ‘Joint and Several Liability”. It can hinder further borrowing capacity.  Banks very thoughtfully ascribe 100% of the debt to each of the borrowers, but only a portion of the rental income.

JVs in which all parties are borrowers might be best suited to short term projects or immediate refinancing.

To find out how Paul Ransley and the Team at Finding Finance can find you the right loan and create the right loan structure so you can confidently move forward click here.