This snippet is from one of our previous episodes: Q&A – Investing in Newly Developed Areas, Getting into the Property Market, Career as a Buyers Agent and more.

You’ve saved the deposit. You’ve done the hard yards. You’re ready to get into the property market.

But then comes the big question: Will the bank actually lend you the money?

A lot of people assume that if they have a big enough deposit, the bank should be happy to lend.

But as Bryce & Ben explain in this Throwback Tuesday episode, lenders are not just looking at your savings. They’re looking at whether you can comfortably repay the loan over the long term.

A strong deposit is a great start, but it is only one part of the picture.

Before applying for a loan, it is worth understanding:

  • Whether your income is stable enough
  • How your employment type affects your borrowing capacity
  • Whether your expenses and dependants reduce your serviceability
  • How your credit history looks
  • Whether your tax strategy is helping or hurting your borrowing plans

Having Trouble Getting a Loan?

Consider speaking to an experienced mortgage broker. They can help you understand whether the issue is your borrowing capacity, your income structure, or simply how your financial position appears on paper.

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If You Enjoyed The 3 Cs of Lending: What Banks Really Look At, You Might Also Like:

Transcript

Ben Kingsley
Hey, this one’s from Ben.

“Hi guys, love the podcast. I stumbled across your podcast when I was searching for investor information. I enjoyed it so much that I went back to the beginning and listened to every single one in the space of about three weeks.”

Bryce Holdaway
Thank you, Ben.

Ben Kingsley
“I’m 21 years old and working part-time while also studying. I’m planning and on track to have a 20% deposit for a $400,000 house saved up in the next 12 months.”

Good on you.

“However, due to the nature of my work — personal trainer — my weekly pay can vary dramatically, anywhere between $300 and $900 per week, with average yearly earnings of around $25,000. And the fact that I’m still studying and unable to work full-time to increase cash flow for the next few years, I envisage that I’d have to wait, or have no chance of being successful in getting a loan to match my circumstances and my end goal, i.e. early retirement on $100,000 a year.”

Sounds like a good name for a book. So what’s that book called? The Armchair Guide to Property Investing: How to Retire on $2,000 a Week. Small plug.

Bryce Holdaway
Yeah, but that means $104,000.

Ben Kingsley
Sorry, yeah. Ben, you’ll have to adjust it by basically another four grand a year.

“Is there anything I can do to get into the market sooner rather than later without substantially increasing my cash flow? Or should I just keep saving? Cheers, and keep up the great work.”

Bryce Holdaway
Well, I think we need to rewind about two and a half minutes, because it really comes back down to cash flow.

All things being equal, we chase a capital growth property. But in the ambiguity of his income scenario, plus the study, plus the uncertainty around that first step on the ladder, it might be that an income property helps subsidise some of those cash flows.

So I think it really just comes down to this: I applaud that at 21, he’s starting early, and there’s plenty of time on his side. With that in mind, if he’s putting himself under enormous pressure, as you know, Ben, the quality of life is pretty ordinary. You don’t want to have a white-knuckle ride.

So I would suggest, at face value with what we know, without knowing what the next five years and the big rocks in his life look like, that yes, you could. But don’t stretch yourself too far. Find the medium between whether it’s clearly a growth asset, a balanced asset, or an income asset.

Ben Kingsley
So I was coming back from the city from a meeting I had in town yesterday, and I was driving with a cabbie. The cabbie says to me, “What do you do?”

I said, “I do property and finance.”

And he goes, “I’ve got an unencumbered home, and the bank won’t even lend me $30,000 or $40,000 to renovate.”

I’m thinking, that’s interesting…

I said, “Tell me about your circumstances.”

And he goes, “I’ve got three children, two in university and the other one still in high school. And I’ve got a wife.”

And I say, “Well, I’ve got to understand what’s going on here, because $30,000 or $40,000 is not a lot.”

Bryce Holdaway
So far, so good.

Ben Kingsley
I say, “What does your wife do?”

“Oh, she’s a home mother.”

So she’s a dependent. All of a sudden, I’ve got four dependents.

“And what sort of income do you earn?”

“Oh, you mean what I tell everyone?”

I’m like, “All right, well, we’ll skip past the cash in hand you take.”

And he says, “I declare about $28,000 a year.”

So let’s think about this and come back to Ben as well. The story here is that the bank wants to lend you money, subject to you being able to repay it. Now, how they do that is they look at what the average person is going to be able to afford in terms of living costs. So they ask all those questions about whether you have dependents, where you’re living, and so on.

If you’re living at home, Ben, it sounds like you are because you’re being able to save really well, and that’s fantastic. But if you think about it logically, the bank is not going to lend $320,000 to somebody who’s on $20,000 a year.

So you need to have PAYG income that’s equivalent, or at least more stable, because being self-employed is a little bit harder. I remember the stats — I’m just trying to think about them now — but it was something along the lines of almost 80% of small businesses fail.

So the banks are effectively saying, “That’s why we’re scared to lend to you, because this is a 25- or 30-year loan term. And if you don’t have the income, then the loan could go bad. And if the loan goes bad, we’re in jeopardy of losing our money.”

That’s the logical part about this. It comes back to saying, if you can demonstrate to the bank that you can afford it, then the bank will lend you the money. They’re not sitting there going, “Ha ha ha, we have all the control.” Lending is how they make their money.

So that’s the big thing.

This cab driver then says, “But in the past, before the GFC, I’d just use my taxi plates or I’d use my home, and people would lend against the asset.”

So they were called asset loans.

Bryce Holdaway
NINJAs. No income, no job, no assets.

Ben Kingsley
So the reality is, that’s the lay of the land. And that’s the way it should be, because we don’t want another financial crisis.

So from your point of view, Ben, keep saving, mate. And the moment you do get into regular employment, where you’ve got stability of income, that’s when things improve. Yes, we can get you a property where it’s going to cost you less because there’s going to be depreciation and higher yields. But the reality is that you’ve still got to satisfy the bank’s lending criteria.

That’s your biggest challenge, and that’s why income is critical. Not just having the deposit. Not just having security behind you. Income is critical.

Bryce Holdaway
The three Cs of lending, Ben: capacity, collateral, character. Your capacity is your income. Your collateral is how much equity you’ve got. And your character is whether you’re a good credit risk.

One thing for the listeners too: your accountant is often at polar opposites to wealth creation. An accountant’s job, particularly for the self-employed, is often about asking, “How can we make sure you don’t pay too much tax and declare the lowest income?” But the bank doesn’t like that.

Was he Joe the Cabbie?

Ben Kingsley
Yeah, yeah. Always Joe the Cabbie.

Bryce Holdaway
So, as Joe the Cabbie found out, he’s declared as little as possible, and now he’s having lending issues.

Ben Kingsley
A couple of weeks ago, we had a couple come in — two brothers running a business quite successfully. It was almost running itself. They had really effective and legal minimisation around how they paid their tax, but they weren’t taking incomes. They were retaining profits and paying off loans.

I’m saying, “Well, that’s great, and that’s good for a tax deduction, but the bank wants to see income.”

Now, the reality is, there was income coming through, but they had these debts they were paying off quickly. So if we turn that into income, all of a sudden there’s potential to borrow hundreds of thousands of dollars.

So it’s the opportunity cost of that money that they’re looking to use. We were having a chat with them about how we say, “Okay, you’ve done a great job, Mr Accountant, but we’ve got a future here around wealth building, and we need income to build wealth. So pay the tax, and we’re on our way.”