Did you know credit reporting is changing?

Did you know credit reporting in Australia is changing? If not, you’re not alone. Despite new credit reporting rules coming into force in July 2018, the vast majority of Australians remain unaware of these changes and how they will impact their potential borrowing capacity.

The new move towards comprehensive credit reporting, now compulsory amongst major lenders, will see more data being included on credit reports, and will likely have a significant impact on investors’ credit scores. But what do these changes mean? And is comprehensive credit reporting a good or bad thing for investors?

What’s changing?

Comprehensive credit reporting, also known as ‘positive credit reporting’, has been in play in Australia since 2014, but has (up until now) remained voluntary. Whilst remaining an opt-in process for some lenders, as of 1^st July 2018, comprehensive reporting became mandatory for the Big Four banks. The major lenders were given 90 days to supply 50% of comprehensive credit data to credit bureaus, with the further 50% to be supplied by 1^st July 2019. But what exactly is comprehensive credit reporting?

The move towards comprehensive credit reporting will see lenders provide more consumer credit information to credit reporting bodies. Under the previous negative reporting system, consumer credit reports would only include information such as previous enquiries for credit products and defaults on payments 60 days or more overdue. However, under the new system, credit reports will now include up to 24 months of additional repayment information, including repayments (made or missed) on credit cards, personal loans and mortgages. Other information included in the comprehensive reports includes:

• When a credit account was opened or closed
• The type of account held
• The credit limits of the accounts
• Up to 24 months of repayment history

How will these changes impact investors?

The inclusion of this additional data isn’t necessarily a bad thing for borrowers. In fact, for those who make repayments on time, comprehensive credit reporting is likely to be a good thing, as it provides a means for borrowers to build a strong credit score and show their positive repayment history. This could ultimately provide borrowers with better credit opportunities and could be especially beneficial for first-home buyers who were previously unable to show their creditworthiness.

Having said this, borrowers also need to be aware of how these changes could negatively impact them. Whilst previous reports would only include information regarding serious infringements such as defaults or bankruptcies, the new inclusion of an individual’s comprehensive repayment history could see those who miss repayments suffer from lower credit scores. Some of the factors that may decrease your credit score include:

• Not making minimum credit card payments on your credit card
• Late payments on credit cards, personal loans and mortgage of 14 days or more (note: this doesn’t apply for utility bills)
• Defaults overdue by 60 days or more
• Submitting multiple loan applications/enquiries

What can you do to protect your credit score?

Whilst the full effects of comprehensive credit reporting are yet to be realised in Australia, the changes have raised increased speculation as to the potential for a move towards risk-based pricing from lenders. Although this is yet to be seen, borrowers looking to benefit from changes to the credit reporting environment will need to take steps towards improving and protecting their credit position sooner rather than later. Now more than ever, it’s important for aspiring investors and borrowers to make their repayments on time and remain up-to-date with the factors that could influence their credit score. Those who do this could be in a significantly better credit position when it comes to applying for a loan in future.

In light of recent changes to credit reporting, our finance specialists will be offering an obligation-free consultation for investors looking to learn more about  their credit position. As part of this advice-driven service, our mortgage brokers will run your comprehensive credit report and help you analyse your results, offering key advice on how to maximize your borrowing capacity prior to applying for a loan.

Case study: the risks of cross-collateralisation

When it comes to growing their property investment portfolio, the majority of investors will look to leverage the equity from their current properties to fund the next step in their investment journey. What many investors don’t realise, however, is that the structure of their existing loans can have critical implications on their ability to do this.

Unfortunately, lenders will often look to structure loans in a way that is favourable to them as opposed to the borrower. In many cases, this often leads to a problem known as cross-collateralisation, whereby one or more existing properties are used as security for a loan. Whilst favourable for banks looking to minimise their own risk, this structure can lead to a number of issues for investors and their long-term goals.

In our latest case study, we highlight some of the key risks and restrictions associated with cross-collateralisation.

The problem

Prior to enlisting Momentum Wealth, the client had approached his bank directly to arrange loans for three properties – his home and two investment properties. When structuring the client’s portfolio, the bank had used the investor’s home as security for both investment properties under an overarching loan amount of $600,000. Unbeknownst to the client, this was about to pose a significant issue for his future plans.

Despite the fact the investor was able to pay off the mortgage on his own residence, this structure meant his home title remain tied up with his other investments. With his home used as security for his investment properties, the investor was running the unnecessary risk of forced sale or repossession of his main residence should he fall into debt and be unable to make his loan repayments.

Further to this, when the investor attempted to withdraw equity to purchase another property, he discovered he was unable to do so. Although he had the required capital to fund a further purchase, his equity was trapped in the complex loan structure, leaving him unable to borrow from the bank for his next investment.

The solution

Faced with this dilemma, the investor approach Momentum Wealth in search for a solution that would offer the security and flexibility he needed to progress in his investment journey.

By refinancing the loan, we were able to uncross and re-structure the client’s portfolio. Instead of using the investor’s home as collateral, our finance brokers set up two separate $300,000 loans against each specific investment property. This freed up the client’s home title and enabled the investor to access the equity he needed for his next investment property. Through doing this, we were also able to identify a more competitive interest rate for the client, saving him over 1% in interest.

The importance of loan structure

As an investor, it’s important to be aware of how the structure of your loan can impact your long-term investment plans and risk exposure. Having the right structure in place can be critical in giving you the flexibility and security you need to achieve your long-term investment goals, but it also holds fundamental implications for the protection of your existing assets. In today’s complex lending environment, especially, this is why it’s more important than ever to find a finance specialist with an understanding of your property investment goals and the structures that support this.

If you’re experiencing problems with your current lending solution or would like advice on financing your next property, our finance specialists would be happy to discuss your needs in an obligation-free consultation.

Is refinancing the right strategy for you?

As an investor or home buyer, choosing the right loan product can be crucial to your financial security and long-term investment plans. However, the lending environment and your own financial situation can also change over time, which means your original loan may not always support your ongoing needs. In these situations, many investors will consider refinancing their loan to achieve a better rate or gain access to products that better suit their circumstances. However, this strategy can also carry significant risk for those who don’t understand the costs and implications involved. So, when should you think about refinancing? And what are the factors you need to consider before doing so?

Why refinance?

Better rates elsewhere – The lending environment is highly competitive and will often fluctuate with changes in market conditions and lender’s policies. This means that what might seem like a good rate today won’t necessarily be the best interest rate for you in future. Many investors will choose to refinance when there are lower interest rates available with another lender. In addition to reducing monthly repayments, this could ultimately help you pay off your home or investment loan sooner. In addition, refinancing may enable you to access a greater range of features and add-ons, such as redraw facilities and flexible repayment plans. Reviewing your loans every twelve months, or when there are considerable changes in the lending environment, can help you ensure you are still receiving the best rates and products for your circumstances.

To leverage equity – Another reason investors might choose to refinance is to access the equity they need to progress in their investment journey. If you are planning to renovate or want to expand your portfolio by investing in another property, you will no doubt need to borrow more money to do so. If you’ve paid off some of your existing loan and your property has increased in value, refinancing may enable you to access the equity you need (and therefore borrow the money you need) to take the next step towards your long-term investment goals.

Your circumstances have changed – As an investor or home buyer, it’s important to ensure you choose the right lending solution to suit your situation. However, your situation can also change over time. If you are expecting a change that will have a significant impact on your cash flow, such as a drop in income at work or a reduction in household earnings due to pregnancy, you may need to re-address your financial situation to ensure you can continue to make repayments. If cash flow is a concern, refinancing may enable you to access a rate or lending product that is more suited to your current circumstances. For instance, if you require stability of repayments due to temporary life changes, switching to a fixed-rate loan could give you access to a more predictable repayment plan.

To consolidate debt – Some investors will choose to refinance their loan as a means of consolidating other debts such as personal loans and credit cards into one facility. This can benefit investors who are struggling with large interest repayments by potentially enabling them to bring together their debts and access lower interest rates to reduce their overall monthly repayments. However, since home or property investment loans typically have longer terms, you will also need to ensure the benefits of this outweigh your long-term costs by making additional repayments as quickly as possible.

To extend interest-only periods – With recent changes in the lending environment triggered by APRA regulations and the scrutiny of the Banking Royal Commission, some investors are finding it difficult to re-extend interest-only periods on their loan. If you’ve been unable to do this with your current lender after re-assessment of your situation (now standard practice amongst most lenders), you may be able to refinance to another lender. However, it’s important to remember that each lender will have their own unique policies, meaning your eligibility for certain products can differ vastly between different banks. To avoid submitting multiple enquiries, which could have a negative impact on your credit score, speak to a broker with an in-depth knowledge of different lender’s products and policies to help you identify the right product for your situation.

Consider the risks

Before making the decision to refinance your loan, there are also some key factors you need to take into consideration. Most importantly – will the savings you make outweigh the costs involved? Although refinancing may help you access a better interest rate, you will also need to consider upfront costs such as exit fees loan, loan establishment fees, break costs (for fixed rate loans) and, should you need to borrow more than 80% of the property’s value, Lender’s Mortgage Insurance. If your projected profit doesn’t exceed your potential losses, you will need to reconsider your strategy.

In addition, you also need to remember that property appraisals are an inevitable part of refinancing. Afterall, lenders will need to know your property’s worth before issuing a new loan. This is where it’s really important to get your property professionally appraised prior to submitting a new loan application, or to work with a broker who has access to these valuations. If your property has reduced in value, this will have a significant impact on your ability to access better terms on your new mortgage, and your broker may recommend against refinancing.

If you’re thinking about refinancing but don’t know whether this strategy is right for you, our specialist mortgage brokers would be happy to conduct a complimentary review of your existing loans in an obligation-free consultation.

MPF Diversified Fund No.2 open for investment

Mair Property Funds has opened our latest fund for new investment.

MPF Diversified Fund No. 2, which currently comprises three well-leased commercial assets, is structured to acquire a diverse range of commercial properties across multiple states, including industrial facilities, large format retail, offices and medical centres.

The fund follows the success of our raising for MPS Diversified Property Trust No.1, which closed in September 2017 after unprecedented levels of investor demand.

Mair Property Fund’s Managing Director, David Ellwood, says the success of the fund provides a strong reflection of the growing demand for commercial property trusts amongst investors.

“We are seeing increased enquiries from savvy investors looking to diversify their property investment portfolio into different asset types and locations”

“The lower capital required to invest in commercial property trusts, as well as the higher yields typically associated with commercial assets, are providing a  strong incentive for investors looking to reduce their risk whilst benefiting from a passive income stream,” he said.

MPF Diversified Fund No.2 is projecting initial income distributions of 7.5% for the first year, with average projected distributions forecasted at 8% per annum or more over a five-year period.

To commence the portfolio, we have purchased three assets, including a large format retail asset tenanted by a national liquor franchise, a new industrial facility based in Queensland, and a Brisbane-based medical laboratory tenanted to specialised medical equipment manufacturer, Aim Lab Automation Technologies.

The assets are 100% leased and offer a WALE of seven years, with minimum investment for the fund starting at $50,000.

Mr Ellwood says he is confident the assets offer strong criteria for long-term success.

“Our asset selection process has been heavily focused around targeting stable, high-quality assets with long-term potential for income growth”

“With strong tenancies in place across the first three properties, as well as the diversity of the tenancy mix and asset types, we are confident these properties are well-positioned to perform and deliver strong investment returns,” he said.

We are now actively seeking further assets to incorporate into the fund, with the aim to build a portfolio up to a total value of circa $60M.