How the right broker could be the difference between ‘yes’ or ‘no’.
Once upon a time, when we wanted a loan, we’d go and chat to our local bank – most likely the one we’d loyally been with forever.
This was a time when the banker knew your name and had possibly handled your parents’ mortgage. It was a time before ultra-low interest rates, ultra-high debt levels, sky-rocketing property values and strongly regulated lending criteria.
Then along came the GFC, the Banking Royal Commission and a tightening of rules around loan applications. Also emerging were a host of specialist mortgage companies, breaking the monopoly of banks offering home and personal financing.
These big changes in rules and choices created a need for professionals to help prospective borrowers navigate all the different products, rates, lending criteria, application requirements and paperwork. Enter the mortgage broker.
These loan experts, such as the brokers at WhiteStar Group, spend their days keeping up-to-date with all the latest mortgage and loan packages, researching the best rates for different circumstances, and the big one: getting a handle on all the things that individual lenders take into account when working out an applicant’s borrowing power.
Ok, so what’s borrowing power?
Put simply, it’s a calculation of how much a lender thinks you can afford to borrow, and therefore, how much they’re willing to offer you. It can determine what sort of house you’re able to buy, or whether you’re able to complete debt consolidation or a renovation
Every lender has their own benchmarking for borrowing power (along with other lending criteria that needs to be met). And, if we just look at income and expenses, they can vary substantially amongst the lenders.
Take the real scenario below. They’re both well-known lenders with competitive products and rates, however as you can see their calculations for borrowing power is quite different.
Mr and Mrs Borrower
Number of dependent children: two
Living expenses: $3,500 per month
Credit cards: one at $6,000
Credit and repayment history: clear and good
Mr Borrower: $65,000, full time with PAYG tax
Mrs Borrower: $45,000, full time with PATG tax
Based on the above criteria, Lender A offered the family a maximum of $495,000 at a current borrower rate of 3.08% with a comparison rate of 3.42%
Based on the above criteria Lender B offered the family a maximum of $585,000 at a current borrower rate of 3.09% with a comparison rate of 3.09%
These offers are based on actual borrowing power calculations by two well-known and reputable lenders. The difference is $90,000 and yet, the rates are almost the same.
Mr and Mrs Borrower could have spent a lot of time shopping around for the best deal, or they may have assumed that Lender A’s offer was the best and been almost $100,000 worse off in their borrowing power.
What’s more, when borrowers go from lender to lender applying for multiple loans in a certain period of time, it can negatively affect their credit file.
All up, trying to do everything yourself can mean you miss out on an ideal opportunity or prevent you from buying something you have your heart set on. It’s why having a broker on your side doing all the groundwork can save you time, money and heartache.
A Cautionary Tale: Not all brokers are the same
While using a broker can usually be a good thing, always make sure you’re dealing with one who is reputable, reliable, knowledgeable and clear and timely in their communications.
We recently heard of a financially strong couple with good jobs, secure incomes, and a flawless repayment history, who wanted to refinance and consolidate a couple of smaller debts, while also securing a better interest rate. As they felt it was not a significant matter or amount, they decided to apply through an online broker. Unfortunately, due to a mix up in communication, they thought that their application had been approved and stopped making payments on their existing mortgage (since the assumption was that they’d now pay the refinancing lender).
Their loan application however had not been approved because it was either, not presented properly, or it didn’t meet the lender’s criteria.
It was an honest mistake on the borrowers’ part, however, with the new comprehensive credit reporting, those payment arrears will now be on their credit record for all lenders to see for the next two years. A simple miscommunication now means that their credit profile has dropped, and they’re no longer seen as a prime borrower. All because they chose the wrong lender.
That’s why we always recommend that potential borrowers take the time to speak to a person not a computer.
We understand that everyone wants the best deal, but often, the lender who’s offering the lowest rate isn’t the best fit for a borrower. For example, their terms and conditions may be onerous, or their lending criteria may be too strict.
Having a conversation with a real broker can help you find a loan product that still offers a good rate, but better meets all your needs.
Only so much they can do
Of course, even the best brokers can only achieve so much. The rest comes down to the credit profile of the applicant, and the key to this is taking control of expenses and repayments. And there are two reasons why it’s more important than ever:
- Firstly, lenders now review bank statements and calculate living expenses. So, every dollar spent on luxury items or take away meals, gaming, gambling, entertainment and impulse shopping will affect your borrowing power, and
- Secondly, comprehensive credit reporting now shows the last two years of repayment history on all debts. Even if that debt is no longer open.
So, what’s the answer?
Make sure you stay on top of your credit file and stay on top of your expenses. Know your money backwards with WhiteStar Money. It’s a simple, secure and comprehensive app and program that keeps you up-to-date with all your expenditure and can help you avoid making unnecessary purchases that can affect your estimated borrowing power. Then, when you think you’re ready to borrow, call 1300 652 842 to discuss your options.
*Example used was based on rates and criteria from 2 large well known lender. The rates and criteria were valid as at 28-2-2020 and are subject to change. This is not an offer of credit and has not taken into account the sample customers’ requirements and objectives. It is for demonstration purposes only.For a personal affordability check an enquiry must be made with our team who can assist further.