Before we begin………………

To get one’s ducks in a row
“to ensure all of the small details or elements are accounted for and in their proper positions before embarking on a new project. In written form, most believe the term originated in the 1970’s. But at least one article has been found where the term was used as early as 1932.”

What strange days these are. Not that long back our business was booming, and new loan approvals came thick and fast. In fact, the loan approval was scarcely cause for celebration as we run like hell just to keep up with demand.

As of today, business is ok but no records being set. New loan approvals are met with a mixture of elation and relief and we are running ads suggesting that getting a deal approved is akin to pulling a rabbit from a hat. In truth it’s not quite that difficult but the marketing theme and imagery was too good to miss!

Of course, the key to a positive outcome in the current environment is not just reliant on the aforementioned fluffy tailed hopper and 19th century head gear. Before the magicians in finance (that’s us) can conjure the trick, ducks must be assembled and put in a row. Like most magic tricks’ preparation is key and best done in private so as to impress the audience.

While it’s not possible to write a definitive finance application preparation list in this format let’s have a look at a few key areas that will help us to help you.

Finance Application

Yes, it’s a laborious task and a spectacular example of the nanny state we live in. Resistance is useless and raging against the process is a waste of energy. Don’t paint yourself as “difficult” lest the bank decide that you’re more trouble than you’re worth. Stay calm and carry on filling in the many many forms.

Timeliness

We will describe you to the banks as a highly organised professional with exemplary management and record keeping skills. Try to help us prove it by being just that. Our staff are here to help. If you suck at collating bits of paper tell us and you will get all the support you need. We want to turn up at the bank with everything they need and no hint of the amount of paddling those ducks are doing below the surface.

Financial Records and the Tax Man

Lodge your tax on time, have your last few returns ready and make sure you have no overdue tax payments. If you have, tell us and let’s get this sorted before we turn up at the bank. If you have the money to clear the arrears do so. If not, we are going to need one hell of a story and preferably a true one.

Skeletons in the Closet

Got an ex-partner with asset claims. Maybe contested credit arrears and a loan guarantee on a relative who’s done a runner. We need to know, and we need the back story. Here’s a simple truth. Painful as it may be to disclose this sort of stuff it will speak volumes as to your character. Make no mistake, nothing looks worse than the bank finding out that you failed to make appropriate disclosures.

Risk and SWOT

Our job is to paint a picture. That picture should reflect a low risk transaction for a low risk borrower. There is no such thing as zero risk (buying the MD a bottle of Krug gets close) so the trick here is to identify risks and mitigate them. A compelling business plan (we can help), a few embarrassingly positive references (not from your mum), a detailed CV including your Nobel Prize in Economics and a SWOT analysis goes a long way. What’s SWOT you ask? No, it’s not a paramilitary credit approval persuasion team, as inviting a prospect as that may be. It’s a way of addressing key areas of your application via Strengths, Weaknesses, Opportunities and Threats.

The headings are self-explanatory but given that accommodation and property management have their own unique characteristics we are happy to review your plan and edit as necessary. Like the business plan, SWOT analysis should not get bogged down in waffle. For example, growing the letting pool as an opportunity only works if you can describe how you’re going to do it.

Demonstrating self-awareness is a big positive with lenders. Admitting a weakness and outlining the plan to get up to speed reflects strong business planning skills and will be well received. Trust me, the credit manager looking at your application can see where the weaknesses are so addressing them early just makes good sense. We will always discuss the pros and cons of your situation and work with you to develop a plan that maximises the chance of a good outcome. On the other hand, if you are clearly trying to climb Everest without oxygen or a rope we’ll suggest a stop at base camp. Not saying the summit is out of reach, just might be better to start with Mount Tamborine and work up from there.

Equity and Debt Servicing

You’ll need some equity by way of cash, sale of assets or supporting security such as a house you may own. If you are getting the dough from a third party, we need to know. If it turns out that money you said was yours turns out to be a “gift” your bank application will likely turn into a large paper plane heading our way at speed and on fire. A genuine gift from family is fine provided we know about it from the get-go and it’s documented accordingly. Equally, borrowing against your house is fine while borrowing against your 90-year-old mums, not so much. As always we need to know exactly what’s going on as we get one chance to present a compelling case to the bank.

Much has been written about debt service standards post banking royal commission. Having said that not much has really changed and that’s because the fundamentals remain true. We’ve got to be able to show a bank that you can meet your commitments from day to day cash flow, regardless of your gearing and asset position. If your loan term is 20 years and you take 5 years interest only you’ve got to be able to show that you can meet payments to clear the debt in 15 years, the so-called balance term. On top of this we’ve got to stress test your repayment capacity by using a higher interest rate than currently available. Arguments around the likelihood of interest rate rises, capacity to clear debt from asset sales etc don’t usually cut it.

Following the royal commission living expense tests, which can have a significant impact on debt service capacity outcomes, have moved to a more individual level rather than a standard allowance as was previously the case. This has led to borrowers being compelled to detail living costs in great detail and lenders to trawl through bank statements in some bizarre attempt to establish the lifestyle costs of the punter. The premise being that borrowers have no capacity to adjust their lifestyles in order to meet their commitments. This whole laughable saga came to a head when ASIC had a crack at Westpac in respect of their responsible lending living expense testing. I will leave you with what Justice Nye Perram had to say in his landmark, and entirely sensible, skewering of the ASIC case :

“I may eat wagyu beef every day washed down with the finest shiraz but, if I really want my new home, I can make do on much more modest fare,” wrote Justice Perram as he carved up the argument that a consumer’s declared living expenses should be the key to assessing whether they could meet loan obligations.

“The fact that the consumer spends $100 per month on caviar throws no light on whether a given loan will put the consumer into circumstances of substantial hardship.”

A blow for common sense to be sure.

Mike Phipps
Director | Phippsfin PL