Switching Banks

Consider how lifestyle changes affect your ability to borrow

Refinancing is essentially applying for a new home loan with another bank, and it is likely that your financial circumstances have changed since you applied for your last home loan. Hence there is no guarantee that the loan will be approved. You must consider this risk before applying for refinance.

There are some changes that will adversely affect your affordability for borrowing. Therefore, your loan application may be declined which would affect your credit score. For instance:

  • Changes in your income and expenses – If you have increased your credit card limit or have taken a personal loan, or maybe the overtime income you earned has decreased now. If these factors were not present during your initial application, your affordability would be negatively affected.

  • Changes in bank lending policies – Bank’s lending policies are constantly changing and this could mean you may find it harder this time around to qualify for lending.

  • Credit score has deteriorated – All loan approvals are subject to satisfactory credit checks. If your credit score has deteriorated, your application may be declined.

  • Changes in property – If there has been any unconsented work done on the property or the property is damaged then the bank may not accept it as security and may not provide you the new home loan unless these changes are rectified

  • Guarantor - If you have a guarantor for your existing home loan, you may not be able to refinance without the guarantor supporting this new home loan as well.

Property Investment

Refinancing is essential for property investors who depend on the equity of their existing property to fund part of, or all, their deposit of another property purchase.

Building a property portfolio like this is convenient for an investor as they don’t need to inject their own cash into the purchase, because they’re relying on equity in the existing properties. However the lack of flexibility at property sale time is one of the downsides. For instance, if you decide to sell a property, the bank may need you to use some, or all, of the sales proceed to repay principal off your loans, to ensure the LVR on the remaining loans and property values is maintained at an acceptable level. This is especially valid if you are selling a property with built up equity and if there is a drop in value of other properties that will continue to be held by the bank.

The lenders may also restrict the type of loan and interest rates of loan granted to you if your dependence on a single tenant is high. They may also ask you for registered valuations of your remaining properties every time you sell a property.

It is a good idea to review your portfolio and lending from time to time, as this will enable you to take advantage of any restructuring opportunities; allowing you to obtain any benefits and better terms and conditions. It is also good practice to diversify your exposure to different lenders as your portfolio grows.

Before making any significant changes to your borrowing and security structure, we recommend you discuss your personal circumstances with your lawyer and accountant so you can ensure it’s all structured most appropriately for your own situation.

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