Forums / Getting Technical / Finance / I need to understand how the banks view LOCs, please help.

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  • Profile photo of brizziegirlbrizziegirl
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    @brizziegirl
    Join Date: 2009
    Post Count: 16

    I am wondering if anyone can help me please.

    We are looking at purchasing an IP and need some help in understanding how our bank will view our current situation.

    Two years ago we refinanced and moved to Commonwealth Bank and created a LOC. We have used 2/3s of the LOC and we previously both worked full time making $100k and $50k. Now we make $100k between us.

    A mortgage broker has suggested getting our two properties re-valued. I am concerned if the properties value down rather than up, will the banks look at our current structure and want to change things (ie we may be over-leveraged now) or can we ask for a valuation and banks generally don’t consider a review of our finances, or is it a possibility.

    Also, if they value up more, can we ask for an increase in the LOC even if our income has been reduced or will serviceability be an issue?

    (We did ask for a $40k additional loan for a garage about a year ago and were told by the bank we only had about $40pw spare on their calculations, so the answer was no and that was when we both worked full time).

    Any input very much appreciated.

    Profile photo of DerekDerek
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    @derek
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    brizziegirl wrote:
    Two years ago we refinanced and moved to Commonwealth Bank and created a LOC. We have used 2/3s of the LOC and we previously both worked full time making $100k and $50k. Now we make $100k between us.

    When assessing your serviceability the banks will assume your LOC is fully drawn and their calculations will be based on a debt of $100K and not $66K. Clearly this is a knock on any serviceability calculations as it relates to LOCs. One of the issues with creating large LOCs is that they can really knock your servicing for future loans.  That is why it is important to have a great broker working with you.

    brizziegirl wrote:
    A mortgage broker has suggested getting our two properties re-valued. I am concerned if the properties value down rather than up, will the banks look at our current structure and want to change things

    Before your broker submits anything you need to do a lot of research (and your broker too) to make sure your existing properties have not retreated in value. If your security level has declined then the banks may well ask for a reduction to your LOC or worse some money put and so on. Tread very warily with this one – your broker may well be able to do a lot of behind the scenes work without submitting a formal application and bank valuation to the bank before you consider further. 

    brizziegirl wrote:
    or can we ask for a valuation and banks generally don't consider a review of our finances, or is it a possibility.

    Some bank professional packages allow for free valuations – but given your situation I would tend to let sleeping dogs lie at the moment. That is unless your research gives you a good indication of a positive outcome for yourselves.

    brizziegirl wrote:
    Also, if they value up more, can we ask for an increase in the LOC even if our income has been reduced or will serviceability be an issue? (We did ask for a $40k additional loan for a garage about a year ago and were told by the bank we only had about $40pw spare on their calculations, so the answer was no and that was when we both worked full time). Any input very much appreciated.

    The reduction to your income will, in all likelihood, mean you will not be able to borrow additional funds. The counter to this is that interest rates have reduced in more recent months so this will go some way to improving your serviceability if you remained on the same income. But based on the remainder of your comments I would suggest any increase to a LOC would be unlikely.

    Having said all of that I am not a broker so ……………………………………….

    One question for you – is it wise to increase your LOC at the moment given interest rates are extremely low and any rates rises in the future may put additional stress into your situation?

    Profile photo of Mick CMick C
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    @shape
    Join Date: 2010
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    ^^ Derek is spot on!! I have a feeling Derek is a Buyers agent by day and a broker by night :)

    But in summary, doesn’t matter how much of your LOC you have used banks will look and calculate on the full limit.
    Also the bank has the right to reduce or stop your LOC at their discretion….so your broker will need to do the research before hand to check and get an idea what your property might be worth – Most brokers should have access to a range of valuation tools.

    Regards
    Michael

    Mick C | Shape Home Loans
    http://www.shapehomeloans.com.au/
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    Same Banks. Better Rates. Served With a Passion.

    Profile photo of brizziegirlbrizziegirl
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    @brizziegirl
    Join Date: 2009
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    Thank you both James and Michael for your advice and the time you took to answer it well.  I really appreciate the heads up about the potential issue with valuation – and my instincts really told me as much, even though I'd love to believe the banks wouldn't worry if I wanted to slip in another valuation

    I also appreciate your input about the LOC.

    Thank you both.

    Profile photo of jonmardelljonmardell
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    @jonmardell
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    Yes good advice above but a couple of extra things, firstly if you want to get the properties valued upfront CBA has a $99 special on customer ordered valuations so you could get this done on the properties before making decisions or submitting an application. Also since rates have come down your servicing may have increased but this is hard to know without knowing the full details.

    Profile photo of WomeninPropMelbWomeninPropMelb
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    @womeninpropmelb
    Join Date: 2008
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    Before you pay for any valuations – you could get a real estate agent to provide you with appraisals – For FREE. They should give you the approximate appraisal value on the homes along with property sales in the area as a full report. This will give you a good idea on how the market is around you.
    Make your real estate agent your best friend. They love to do this. I am not a real estate agent any more but the more appraisals you do the more your boss is happy.
    You can tell them you are not selling- if they dont give you the full report – dont bother with them in the future.
    I recently asked my local agent to give me an idea of price and he came with the full report.
    The valuers are supposed to give you an unbiased valuation but they usually consult agents in the area too.
    I did do an appraisal for someone once and she used it to argue the value of her property up and get the loan across the line.
    Your broker can give you an idea of serviceability before you submit anything to banks.

    Profile photo of Jamie MooreJamie Moore
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    I wouldn’t bother with an REA appraisal – they inflate the price and it will have no bearing on what the professional valuer believes its worth and what the bank is willing to lend against.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
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    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of brizziegirlbrizziegirl
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    @brizziegirl
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    Thanks for the additional input – even if I paid for the valuation through the CBA I imagine the same potential risk would still be there?

    And Derek, sorry I didn’t credit you with your feedback – sorry for my confusion.

    Cheers everyone.

    Profile photo of jonmardelljonmardell
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    @jonmardell
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    brizziegirl wrote:
    Thanks for the additional input – even if I paid for the valuation through the CBA I imagine the same potential risk would still be there?

    And Derek, sorry I didn’t credit you with your feedback – sorry for my confusion.

    Cheers everyone.

    no the valuation is done via valex so you dont have to put your details in

    Profile photo of WomeninPropMelbWomeninPropMelb
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    @womeninpropmelb
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    Well I did say the Real Estate Agents do it for free.
    I have found agents in the area to be spot on when I have told them what I want the appraisal for.
    Maybe you choose agents that are not all that good when you get inflated prices Jamie – or you are not clear on what you are looking for?

    Profile photo of Jamie MooreJamie Moore
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    @jamie-m
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    WomeninPropMelb wrote:
    Well I did say the Real Estate Agents do it for free.
    I have found agents in the area to be spot on when I have told them what I want the appraisal for.
    Maybe you choose agents that are not all that good when you get inflated prices Jamie – or you are not clear on what you are looking for?

    Hiya

    Not specifically referring to me – rather its clients who say “the real estate agent said it was worth x” and then the valuation comes back quite a bit lower. I see it all the time – across each state.

    If the OP wants a clear understanding of how much their property is worth than a full, independent valuation is the only way it will be achieved.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

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