Applying for a Mortgage

SUMMARY KEYWORDS

valuation, mortgage, property, lender, valuing, put, proposition, developer, market, worth, reality, comparable properties, people, ticks, cash flow, money, bit, product, prices, realise

SPEAKERS

Brett (100%) 

Brett Alegre-Wood

0:00

Hey guys, so it's time to get a mortgage now. Now what does that mean? Well, I think the key here is most people think they understand mortgages. Okay. And if you've been through a mortgage process before, you've probably been through it on your home, you may be on a beitler. But what I wanted to do was give you a bit of background into what's in the psyche, what's in the thinking of the actual lender who's going to lend you the money, okay? And, and to give you a bit of background, my background is actually as a mortgage broker, and I actually set up a mortgage company, which is now the fifth largest mortgage lender, non bank, mortgage lender in Australia. So I was there first, I was the first person to be part of that, you know, so I've seen that grow over the period. And so what I understood really was about why and how to lend that money, I ran a lending office. Yeah, at one stage where we were doing about 300 applications. I think it was a weak at that stage. So you know, it was quite a large office, it was doing a lot of business. And so I actually had delegated authority up to I think, was about 700, or $500,000. This is back in Australian days. So we've got a really good basis for this. And the reality is, money and lending has not changed. Yeah, what has changed is the level of detail that you have to go into, to back up, you know, the decision. Alright. So, and really, but it's remained the same. And what I mean by the remain the same is, the principle is exactly the same. And this is this, we talk about one thing that's called the three P's of a mortgage application. Okay? So what are those three P's, that person, property, and proposition, okay. So if you get ticks for all three of those, then you are likely to get a yes, in your mortgage, if you get a, you know, a cross on one of them, then you're likely to be either declined, or you'll have to go back and put more money in or depending on what the cross is for. So let's talk about each in turn. So bottom line is to keep it really simple person, property proposition. So the person is all about the documents you provide them, and the credit file that they get. All right. So that's why it's important to have clean credit and things like that. So credit file plus or documentary, so that can be bank statements that can be whatever else that is proof of ID, proof of address that sort of stuff. Okay, so that is what the person is, and we'll talk a bit more about that. But the, the property, okay, so the property is all about the valuation, now that valuation could be a desktop valuation, which is where they go onto a computer, and they look at the data they've got, and they come back with that was worth, and they come back and listen to the specs. And this is where it is, you know, or it could be a drive by, which is where they send a value out. And they don't actually go into the property, but they drive by the property, they drive by the block, okay. Or it could be a full blown valuation, which is where they book in with the tenant, or the developer or whoever it is, and they go in and they see the property, okay, so there's sort of three levels of valuation that you have, and based on the results of that, okay, they will then give a tick to the property. Okay. And then the third one is the third one that you don't have any control over. So the third one is the proposition other words, the product that you're choosing from the lender you're using, okay, they will have their criteria. So they may say, they don't lend to anything with a shop down the bottom, in which case, if you're a shop down the bottom, you're gonna get the big X, okay? Or it may be that actually shops down the bottom, but they can only be categories, b one, or C one or whatever it is. Okay, so there's restrictions. So the proposition actually is where you start at which you, you will see it as the product, okay? Because the lender will say, this product or that product, and they'll have a name for it, but you may not see the intricate details of how they assess that. Yeah. And so this is the key here is what you're going to do is you're gonna put your best foot forward from a person perspective, from a property perspective. And from a proposition perspective. All right. Now, realistically, the person you can control, okay, the property, you can't necessarily control how it relates to the proposition, alright, or the product. Okay. So I think that's important to really understand that if you choose the wrong lender and product, it doesn't matter how good you are, if the property doesn't match it, it's not going to get a yes. All right. So all three of them have to be ticks in order to get the money through and that's at that level. Now we can go into, you know, as much detail as you want about the person. So, you know, it's there's a generic things like, you know, have you saved up the deposit. Have you shown discipline to do that? Do you not have, you know, credit card debts? store card debts? Do you know have, you know all this sort of stuff because what they have to do as part of the person side of things is affordability. So they have to make sure you can afford to pay the mortgage. Yeah. And if proven that historically, because let's face it, they can't they don't have a crystal ball to look into the future. So what they have to do is based on the past and the past, is the last six months bank statements. It might be, you know, your history in terms of how long you've worked for your job. It might be a reference, you know, all the confirmation employment from your job. There's a range of things they can look at. Yeah. And certainly now with open banking, they can go in and they can look at the thing. And it's things like, you may have a, you know, you may put a cheeky bet on at the gambling place every Friday night. Now, as an underwriter, if I saw that, my concern would be is how serious is it? Now, if it was once off, you know, they're gonna say was my brother's birthday, and he wants to go to the pub. So I put 50 bucks on or whatever, you can tuck that away, that's fine. If it's every single week, and it's 300 bucks, and your disposable income is only 300 bucks. Well, now, that's likely as an underwriter, I'd be saying, You know what, it's not worth the risk. Because generally those things only get worse over time. Yeah. So this is the sort of thing you're looking at, for the person. And then the property, obviously, we have to make sure the property is there. And unless it's sometimes with an Off Plan property, it may not be completed yet. So they're going in, and they're talking to the developer. And you know, what's a built with? What's a spec? What's this? What's that. And so they may be, you know, it's how the developer performs on that for a new build. The good thing is a lot of the developers we work with, is what they do is they pre prepare a kit. So when the developer when the value arrives, they give them that kit, which has all the research, the justifications why this valuation is okay, they may and so this is one of the other things too is value is have a wonderful system called the exit to system. And basically what that means is, they can see what every other value is valuing these properties for, or properties down there. Now, for the most part, a valuation is what we call a comparative valuation. Now, what does that mean? Okay, and this is not for commercial property. This is for residential property we're talking about. So a comparative valuation. So what happens is, we look for similar comparable properties in the area, you know, the same spec, same, you know, everything and see what they sold for. Alright, now, depending on the proposition, they may say, well, actually, we want you to value at a fire sale. So if there's a fire sale there, that's what your valuation might come into, they may say the average of properties over sold in this area comparable properties in the last three or six months. And that becomes the evaluation. So different lenders can have different criteria for how this comparative evaluation is done. And that's why some lenders can be extremely hard about they go about it, and you might find things get down valued. It's not that the property, you know, that's not necessarily reflective of the property, it's a reflection of the proposition of the lender, alright, or the product of the lender. So this is where sometimes you can get a bit stressful, you think, hold on a sec, you told me it was worth this, and now the valuation is coming to this. It's like, well, yes, it's covered that because you've gone with this lender, yeah. Who values under these criteria? Yeah. But actually, you go to another lender and all of a sudden it comes up here. Now the reality is it will never come above what your purchase prices. Okay. And the reason is because no lender, sorry, no valuer in the country is gonna put their ass on the line by saying, actually, it's worth this, and you bought it for that. It's always going to come in at the contract price, or what we've seen in previous years where things were say Rex, Rex is rolling. She was Chartered Surveyors who basically, they are the regulatory body, if you like of surveys, they will come out and they'll say, we think property prices are going to drop 5%. Guess what happens? The most stuff? Yeah, it gets down to a 5%. And maybe even 10%. If you've got a developer, a surveyor, who is, you know, risk averse.

Brett Alegre-Wood

9:11

Because what happened in 2008 2009, when the last, you know, the financial crisis hit, what actually happened was a number of valuers who were valuing at the correct amount that the market was going in the market dropped, they lost their jobs, and their livelihoods, because they were valuing what the market was. And now they were their insurance not claimed against, for whatever reason, because prices are dropped, even though it was not their fault. But the reality was, they weren't able to renew their pie. And if they can't renew their pie, they can't do their job. So a lot of surveyors got kicked out of the industry, I think very wrongly, and now used as a scapegoat for the lenders who were doing the wrong thing at that stage. All right. So But anyway, that's just a bit of history. So just understand that just because a property is Down valued, it may not be because the property is actually worth less, it may be because the criteria of that, or the proposition of that actual funding lender is different. Okay? It could be this debate, the market could have changed. But if you're in an offline, your buyer here, and the market sort of creeps up, you know, the reality is, that may be they may be selling for that in the market, but your valuation is always going to be here. So just be aware of that, you're not going to see the increase in the valuation. Because that is what the contract price is, that's what the valuation is likely to come in. Okay. So if you understand this, then obviously, you can move forward with it. Now, the other side is, when you're choosing a product, now, let's talk about choosing a product because I think this is really key. When we're building a portfolio, we look at every two years, we want to start looking at property, you know, whether that be our mortgages, how much it's growing, you know, can we take more money out? Can we, you know, pay debt off, you know, quicker, you know, that sort of thing. So there's a whole range of options. So generally, what you'll find is you do an initial period. Now, that could be a, you know, one year, two year, five year, I think there's even some 10 year products now coming out? Well, you know, there's been talk about getting 25 year products, which there isn't a US not not a UK or Aussie now, but um, you know, or even Singapore or any of those sort of places. But the reality is, you know, what you need to do is you need to look at what's your affordability is, you know, what the likelihood of rent increases is all this sort of stuff and do a proper cash flow. Because if you do a proper cash flow, and see at the point of sale, you may have got a cash flow. But what you need to do is take that cash flow now, and put the fingers back in and see what the figures are again. Yeah, hopefully, the rents have gone up over the bill programme, hopefully, rates have come down, you know, and you've got more cash flow there. But what you got to realise this, one of things I talked about using mortgage cost averaging as well is, don't just look at the mortgage rate you're paying, look at mortgage cost averaging 6%. And see what how that affects your cash flow for that property. And overall, for the portfolio. Okay. So if you're not sure of what I'm talking about here, speak to the team, and they can take you through a portfolio review. And we can look at what the impact of that is. Okay. Because it's important. I mean, for for a decade, since the global financial crisis, you know, rates have been very low, you know, mortgage cost averaging, why do we think, six 6%, it's never going to be there. One of the things I have stuck to is that 6% all through this, because I knew that at some point, it's likely to come back up. And you know what it has? Now, I think most people are saying 6% is high, actually, 6% is not high. And most people are realising that now that had they done what I said and building a portfolio, they'd be in a much better position. Now, you know, now, it's always hard because it was there so low for so long. That's just that bustle. But yeah, so one of the things that keep an eye out for is the arrangement fee. So arrangement fee can be 3% of the total mortgage, which is a pretty hefty hit, you don't have to put bring that up, but it gets added to your loan. So here's the key. That 3% Yeah, compounded over the 25 years alone, let's say or 20 years, or 30 years, whatever it is, that's a substantial amount. So that 3%, you may end up paying, yeah, 567 percent, the equivalent for that, because it's that 3% is loaned to you, yeah, you'd have to pay it, but it's loan to you. And therefore, your your rates or your pay payroll, the added the mortgage payment will go up by that 3%, whatever that is over the period. So just be aware of that, you know, you want to take into account all the costs. Okay. But mortgages, you know, they're a necessary evil. I know, there's a lot of people out there say, only buying cash, no, you know, what, all of these successful portfolios, I've built, all the people that I see, you know, get mortgages unless they have, you know, there is exceptions, where people are not hugely successful businesses, they're making more money than ours to do with, and they just don't want debt, great. If you're in that situation, fantastic. But for the 99% of people, mortgages are an essential part of what we do. An essential part of what you know, is, is building a property portfolio. So you've got to understand them, you've got to be part of that. And so these three P's, if you understand them, then you'll understand that, you know what, you've got to go through that pain. And here's, here's the reality right now is mortgage that change. I remember back when it used to be a three or five page application, you fill that out, you gave it in, you know, a day later, you got your mortgage. In fact, I've had mortgage application through to completion in the same day. Yeah, you know, I've done that before. We used to do that. Very occasionally. You know, most of the times it would take you know, six weeks, whatever. Now it's about three to four months, you know, because the the level of detail I have to go into, which I think is ridiculous. So I think it is ridiculous, these companies should be allowed to take the risks that they deem fit, not be governed to. Because what a lot of this is doing is it's actually precluding a portion of population, which is the lowest socio economic, you know, so rich get rich or poor get screwed over, you know, and unfortunately, that's what a lot of these draconian processes and laws do. They don't keep people safe. Yeah, they just screw over, you know, everyone else. But anyway, it is going to take time, this process of going through the mortgage, just to talk about the time it's gonna take, you are gonna have to put some time and we talked about effortless, this is not an effortless process. This is one part that has never, it never has been and never will be effortless, like a well, never will be, it might be but right now, it's not. It's a huge imposition, it takes majority of the time they're gonna spend is getting this stuff together, is putting stuff in and then two weeks later, getting asked the same questions or, you know, a deeper question about it and having to go find that data and present it, persist with it, it is worth it. It's a necessary evil, but it's worth persisting with. And obviously, we're here to help as we go along. You know, got the sales progression. side, which, you know, we do most that for you, we will chase you for this stuff. Just get it as soon as you can, you know, and get what you need. And if you're not sure of why they're asking it, then ask the question. Yeah, we're here to answer those questions, you know, so, alright guys, hopefully that gives you a bit of an understanding of the mortgages mortgage side. And yeah, we'll look forward to getting this mortgage approved. Okay, person property and proposition, all three ticks, and then you're good to go right to letter by