All Things Lending

The team at blueprint4 recently undertook some training on the topics of broking, lending and borrowing power, gaining new insights and developing a deeper understanding of some key concepts, tips and tricks that should be considered to maximise an applicant’s borrowing power, and we felt it would be prudent to pass these learnings onto our clients.

Perhaps the most significant lesson was that a no from one lender, does not mean a hard and fast no across the board when it comes to obtaining finance. All lenders weight various financial factors, inflows, outflows, habits and positions differently. However, a failed application can impact on your credit score, so our recommended approach would be to engage a broker early in the process – and have them assess all available options for you. A good broker will be able to find you the right lender to suit your individual circumstances.

Additional to the obvious goals such as borrowing at the lowest possible interest rate and obtaining the amount of funding required, there is another key element in the lending process, being the tax deductibility piece. This is where we come in, and can work in partnership with you and your broker, to structure your borrowings to obtain / retain tax deductibility, getting you the best overall result.

Your credit score is one of the most important factors when it comes to determining your ability to obtain finance. It is important to be aware of where your credit score sits, and what this means. It is also important to be cognizant of what types of activities can impact it. A key learning that was taken was that even credit enquiries / applications that never eventuate (whether they are rejected by the prospective lender, or cancelled by the applicant), such as for a credit card, an increase in credit card limit or a car loan, can all detriment your credit score. “Buy Now Pay Later” schemes also have a negative impact.

Offset and redraw accounts are commonly used resources to reduce the amount of interest paid by a borrower on a source of finance. While these are often thought of together, there are some key differences. An offset account is a completely separate bank account and works as follows - when funds are deposited, they sit against the balance of the loan, and interest is paid only on the reduced balance. A redraw works differently in that it involves physically paying down the loan and then drawing back down on it when funds are required. A redraw can impact the tax deductibility of a source of borrowing, so it is important to understand the potential ramifications. Your adviser can assist you with this.

Finally, we wanted to remind you all that small changes to financial behaviours and habits can have a huge influence over the life of a source of borrowing (like your mortgage), due to the concept of compounding interest. While small periodic additional repayments or drawdowns may seem like nothing – they can end up making a significant difference to the total amount of interest paid over the life of a loan, thus having a significant impact on your overall wealth generation. For example, the total interest saved as a result of repaying an additional $50 per fortnight on top of the default repayments, assuming a $500k loan with a 30-year term and a 6% interest rate, is around $55,000.

If there’s anything more you’d like to know, please don’t hesitate to contact your adviser.