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Loan wars - a new hope

March 31, 2019

“Seriously hard, looking for a loan is.”

Such was the advice our miniature green friend, Master Yoda, gave a young Luke Skywalker, who was trawling through a myriad of Tatooine investment property options. For Skywalker, a freelance Jedi apprentice, a regular fortnightly pay day is in a proverbial galaxy, far, far away, and it turns out that many banks just won’t give him a look in as far as a home loan application goes.

Since 2018 banks and other major lenders have made changes to loan applications to be more cautious about who is granted a home loan. Although the Banking Royal Commission won’t make it more difficult to get a mortgage, it certainly won’t make it any easier, particularly with the drastic changes proposed to the rules effecting mortgage brokers.

Skywalkers’ predicament

Getting a loan is harder, still, when, like Skywalker, your income is neither steady nor regular, as is the experience of many sole traders. Feeling the pinch are freelancers, artists, self-starting entrepreneurs and anyone game enough to go out on their own and who hasn’t had the terrible misfortune of inheriting a squillion from dear old Great-Aunty Doris.

That’s not to say it’s impossible, but it means jumping through a lot more hoops than your everyday wage slave to persuade a lender to come to the party.

Banks, too, face many hurdles they have to clear to satisfy financial regulators like the Australian Securities and Investment Commission (ASIC) and the Australian Prudential Regulatory Authority (APRA). The regime puts the onus on banks and other lending institutions to ensure that a borrower is able to service a loan – or face the lawmakers’ wrath.

Unconventional Employment

And that’s where sole operators, workers in non-traditional areas, casuals and the like find themselves between a rock and a hard place. Clarity Financial Services CEO Mark Edlund says the nature of much of the ACT’s workforce throws up extra pitfalls for would-be borrowers.

“In line with other parts of Australia, casual employment is a growing fact of life. But in the ACT with its strong public sector workforce, many workers are employed through agencies on short term contracts with the ACT and Australian governments,” Mark says.

“Lenders look for an ongoing income stream and security of tenure when assessing a potential borrower – and that’s why many loan applicants are rejected. Short-term agency contractors, part-timers and the self-employed often fall foul of their inability to satisfy those requirements.

“Without wanting to blow our own trumpet, a mortgage broker is best placed to assess a potential borrower’s capability to service a loan – to match a borrower with a policy that best suits their circumstances,” Mark says. “It’s all to do with positioning … we’re in the business of getting people loans while banks are dedicated to generating shareholder satisfaction.”

Tracking your money

Mark suggests that keeping sound records of your finances in earnings and expenditure are worth their weight in gold when approaching prospective lenders.

“It’s all very well to have a good income but, if you blow half of it on a lavish lifestyle, a bank will take a pretty dim view. They like to see consistency – not only in terms of income but also a potential borrower being able to show proof of what it costs them to live. Putting it another way, when parting with their money, banks like to see people living within their means.”

These sentiments were echoed by Clarity’s senior mortgage broker Rob Garth, who says lenders are encouraged by other habits that demonstrate a tidy approach to putting your life on paper.

“Many who operate outside the traditional breadwinner sphere can claim for purchases that assist in the practice of their business. That may include computers and software used to create work, to maintain expenditure and income records, tools and clothing for tradesmen – anything related to generating income.

“Banks are quick to pick up on spurious expense claims and they’ll see through dodgy figures. Bearing in mind that you’ve got to have at least some of the money to be able to purchase work related goods and equipment, keep expenditure claims realistic. Just remember you can’t have your cake and eat it too,” Rob says.

Clarity handles in the region of 100 loan applications a month. Only a few of these would fall into the non-traditional category, of which the following are examples where Clarity was able to assist.

“Many who operate outside the traditional breadwinner sphere can claim for purchases that assist in the practice of their business". That may include computers and software used to create work, to maintain expenditure and income records, tools and clothing for tradesmen – anything related to generating income.

“Banks are quick to pick up on spurious expense claims and they’ll see through dodgy figures. Bearing in mind that you’ve got to have at least some of the money to be able to purchase work related goods and equipment, keep expenditure claims realistic. Just remember you can’t have your cake and eat it too,” Rob says.

Clarity handles in the region of 100 loan applications a month. Only a few of these would fall into the non-traditional category, of which the following are examples where Clarity was able to assist.


What about the Banking Royal Commission?

Obviously, we would be remiss not to mention the proverbial AT-AT in the room: The previously mentioned Banking Royal Commission and its affect on mortgage brokers.

Changes proposed include ending the current system in which banks pay mortgage brokers commissions on home loans they get signed. It has been advised that these changes be implemented in the next two to three years. As of yet, these changes have not been introduced.

John

A 48 year old IT software engineer, married with two children, wanted to purchase an investment property for his son to live in and rent while at uni in Sydney. His existing home loan provider had declined his application so he was seeking to refinance his home loan with another lender – total borrowings of $1.4 million at a Loan to Value Ratio of 60 per cent.

John (an alias) was sourcing income via multiple channels. He was quoting for jobs on a “freelancer” portal and generating moderate income.

Importantly he had been taking jobs online via this and other portals for over four years. He had just finished a six-month contract for a defence supplier and was waiting to start a new contract – also six months – with another company.

During the six weeks between contracts, he ramped up tendering for jobs and had been successful in generating an income approximately 70 per cent of the level he normally earned as a defence supplier.

His 2016 tax returns showed income from multiple PAYG employers on short-term contracts plus a full time PAYG job that he had held for seven months.

As he had been contracting for only a relatively short period and had not started in the new role, John had insufficient contract income history to satisfy a lender. Banks won’t consider future income for a job/contract not yet started – a conservative approach forced on them by legislation. For a lender to accept income in a new contract role, they want to see the first payslip.

Clarity provided the lender a copy of the next contract plus others John had undertaken over the last 16 months, along with payslips and PAYG summaries. John’s 2015 and 2016 tax returns showed modest income from freelancing PLUS all the jobs he had secured between contracts, proving he could generate income via this method when needed.

Bank statements were also supplied showing the freelance income John deposited into his account. Through a combination of factors, the 70 per cent of gross historical income generated via short term freelancing, the signed future agreement/contract and the considerable equity John held in his home, the broker found a non-major lender who would approve a loan at significantly better interest rates than the big bank John had been with for over 15 years.

John was stoked. “Most finance people placed my situation into the too hard basket … I wasn’t easy money. After meeting with more than four finance people your broker persisted until I had a solution. Not everyone can think outside the box but he did.”

Helen

In a second case, a 30 year old single female physiotherapist, Helen, had exchanged two years earlier on an off the plan unit. She had paid a five per cent deposit and, on completion, required a $425,000 loan to finalise the purchase.

Working on a contract basis for several hours a week with the Federal Government, much of her work involved being called in for rehab on government clients. She also derived income as a self-employed contractor with her own ABN through a couple of southside Canberra physio practices.

Helen’s 2016 tax return confirmed her income from these sources along with a four-month stint of full time work at a hospital. Lenders believe that self-employed people who have held an ABN number for less than two years are unable to substantiate an ability to generate consistent earnings over an extended period.

Clarity provided the lender with a copy of Helen’s Federal Government contract, 2016 Tax Return, 2016 PAYG Summary confirming the total income from her government job, and copies of her invoices to the physio practices from July 1 2016 to February this year. Included in the mix were her bank statements confirming receipt of income from her invoices, a copy of her 2015 PAYG summary from her previous full time salaried job at the hospital, and confirmation of her qualification.

By overwhelming the lender with income verification, focusing on Helen’s qualification and verifying consistency of earnings coupled with proving what she had earned in the years prior to going out on her own, Clarity was able to identify a lender that would approve this slightly outside of policy loan at a high Loan to Value Ratio. With a 50/50 chance of approval, Clarity believes the thoroughness of the paper trail won the day.

Solution

For both John and Helen, Clarity went to the lender armed with a proverbial arsenal of finance-related documentation, including:
• Work Contracts – Recent, current and future work contracts encourage a sense of stability.
• PAYG Summaries – Confirm the total income from contract work.
• Tax Returns – Serve as further proof of stable income.
• Bank Statements – Confirm receipt of income from alternate sources, including freelance work and cash jobs.
• Invoices – Demonstrate ability to gain freelance and supplementary work.

It turns out there is hope yet! Like the until-recently-unexplained acquisition of the intricate plans for the first Death Star, there is a way forward for the unconventional workers of the world.

Keeping solidly on top of your finances, and maintaining good records of the items listed above will provide a prospective loaner with a tidy snapshot of your financial paper trail, as well as rein*force* to them your ability to adult.