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Rules of the Lending Game: How to master the game of lending to invest in property
Investing in property is the largest single financial transaction anyone will make. Property buyers usually concentrate their research on online search engines, looking at glossy photos of beautifully staged homes. Instead, they would be better off working out how much they will need to borrow, how they should structure their loan and who would be the best lender. Author and personal finance expert, Stuart Wemyss, admits that finding the right loan is a bit like a game of snakes and ladders. You run up the ladder when you think you've found the lowest interest rate, only to slide down the snake when you realise the fees are high and conditions are stringent. "Interest is the single largest lifetime expense for investors" says Stuart. "The amount of borrowings investors carry affects their net worth and their cash flow and can make or break their retirement goals. Getting their borrowing right and structuring their investments correctly can save a considerable amount of money - often thousands of dollars per year."To make sure you get your borrowing right, Stuart explains the Rules of the Lending Game in this fascinating book. It contains invaluable information Choosing the right loan products Calculating how much to borrow and how to reduce the overall cost Structuring loans to manage cash flow and create wealth Making the most of your equity.
- GenresFinance
242 pages, Kindle Edition
Published January 1, 2022
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35 people want to read
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March 23, 2022building wealth and getting ahead financially
The three main things that determine your personal borrowing capacity are:
1. cash flow
2. equity
3. risk tolerance and financial stability.
‘You don’t know what you don’t know until you know it’?
it’s as easy to establish an incorrect loan structure as it is to establish a perfect loan structure – that’s the problem. You often don’t realise you have the wrong structure in place until afterward – sometimes many years later. Frustratingly, you may have to live with your mistakes, because often they can be too costly or difficult to correct. Therein lies the problem. Mortgage structuring can be insidious, and it’s deceptively easy to make a mistake.
by the time you’ve finished reading this book, you’ll know more about mortgages than your average mortgage broker or lender.
jargon: ‘borrowing’, ‘gearing’ and ‘leverage’
A quick history lesson will give you a deeper insight into the workings of the mortgage market and, in turn, greater confidence when approaching lenders.
Deregulation opened up the banking industry and made it a lot more competitive, which benefited the consumer and encouraged more people into the housing market.
The government played a part in this by underwriting the banks during this difficult time, which meant that customers were guaranteed that their deposit funds would be safe, come what may. The government also lent its AAA rating to the banks to help them access funds from overseas.
when you apply for a loan, banks will typically trawl through the most recent three months of your bank statements in order to determine how much you spend. They don’t distinguish between discretionary and non-discretionary expenditure
A bank is a place that will lend you money if you can prove that you don’t need it. — Bob Hope
Let’s take a look at how the financeindustry lightweights stack up against the heavyweights. The Big Four are well known and recognised brands; however, some second-tier lenders have spent a lot of marketing dollars to get noticed.
A neobank is a bank that is totally digital: that is, it doesn’t have any branches or large call centres.
These days, the only way private lenders can get any money out there in the market is if they offer short-term lending solutions or ‘mezzanine finance’ (typically a loan secured by a second mortgage or caveat) to property developers.
Normally, lenders will aggregate mortgages with similar credit strength. So, they might have $100 million worth of mortgages at an average charge rate of 4 per cent which they will then sell back to the market at perhaps 4.5 per cent or 5 per cent.
Mortgage insurers are third parties to the banks. The two largest mortgage insurers in Australia, QBE and Genworth Financial, effectively form a duopoly, controlling 97 per cent or thereabouts of the market share.
The bank might only realise 90 per cent of the property’s value, should it take possession of the property and sell it (known as a ‘mortgagee sale’). This leaves a shortfall of 5 per cent of the initial borrowings. In this case, the mortgage insurer pays the difference and the bank breaks even.
the most fundamental difference between a broker and a lender is that the broker offers choice (i.e. products from a number of different lenders) and isn’t employed by or tied to one particular lender. Therefore, they’re more likely to tell you the good, the bad and the ugly. When was the last time your bank proactively called you up and told you that because their competitors are offering a lower rate, they’ve decided to match it and reduce your current interest rate? Never, right? And it’s probably never going to happen. However, good mortgage brokers do this all the time, because they need to retain your business and want to earn referrals.
it’s essential to know your limitations when it comes to borrowing
How do you measure your personal maximum borrowing capacity – how much are you comfortable borrowing? And what happens if you get into trouble and struggle with the repayments?
Assessing your borrowing capacity is a very personal matter. For some people, the thought of going into debt doesn’t create any anxiety at all; these people will happily borrow as much as a bank will lend them. Others break into a sweat at the mere thought of borrowing any more than they absolutely have to. This fear might be justified under some circumstances; however, it’s often more a consequence of a lack of education, knowledge and experience. In other words, if these people sat down, crunched the numbers and really considered the risks involved, going into debt may not look as daunting as they first thought.
Control your cash flow, don’t let cash flow control you!
For a lender, your borrowing capacity hinges on three key criteria:
1. income and expenses, known as ‘serviceability’
2. assets and liabilities, known as ‘security’
3. borrowing history, referred to as ‘creditworthiness’.
Example: Assume a property is valued at $500,000 with a rental yield of 4 per cent. The investor borrowed 80 per cent of the property’s value in order to acquire it, or $400,000. The assessed rental income would be equal to, say, 80 per cent of the estimated 4 per cent yield – as 80 per cent is the average gross rental income lenders will generally use. That’s $500,000 × 4 per cent × 80 per cent, which equals $16,000 per annum. This would be compared to the assessed principal and interest repayments on the $400,000 loan at the benchmark rate of, say, 5.75 per cent, which equals $30,200 per annum. (That’s over a 25-year term, assuming that the total loan term is 30 years, with the first 5 years interest-only and the remaining 25 years principal-and-interest.) Therefore, the applicant must have surplus income of at least $14,200 per annum (being $16,000 less $30,200) to qualify for this loan. However, in reality, if the loan is interest-only, the rental income will come very close to covering the repayments, thereby costing very little.
Most investors prefer to limit their loans to no more than 80 per cent (per property) of the current value of each property. One reason for this is to ensure that they don’t have to pay lenders mortgage insurance (LMI). Mortgage insurance can cost between 1 and 5 per cent of the loan amount:
The three main things that determine your personal borrowing capacity are:
1. cash flow
2. equity
3. risk tolerance and financial stability.
‘You don’t know what you don’t know until you know it’?
it’s as easy to establish an incorrect loan structure as it is to establish a perfect loan structure – that’s the problem. You often don’t realise you have the wrong structure in place until afterward – sometimes many years later. Frustratingly, you may have to live with your mistakes, because often they can be too costly or difficult to correct. Therein lies the problem. Mortgage structuring can be insidious, and it’s deceptively easy to make a mistake.
by the time you’ve finished reading this book, you’ll know more about mortgages than your average mortgage broker or lender.
jargon: ‘borrowing’, ‘gearing’ and ‘leverage’
A quick history lesson will give you a deeper insight into the workings of the mortgage market and, in turn, greater confidence when approaching lenders.
Deregulation opened up the banking industry and made it a lot more competitive, which benefited the consumer and encouraged more people into the housing market.
The government played a part in this by underwriting the banks during this difficult time, which meant that customers were guaranteed that their deposit funds would be safe, come what may. The government also lent its AAA rating to the banks to help them access funds from overseas.
when you apply for a loan, banks will typically trawl through the most recent three months of your bank statements in order to determine how much you spend. They don’t distinguish between discretionary and non-discretionary expenditure
A bank is a place that will lend you money if you can prove that you don’t need it. — Bob Hope
Let’s take a look at how the financeindustry lightweights stack up against the heavyweights. The Big Four are well known and recognised brands; however, some second-tier lenders have spent a lot of marketing dollars to get noticed.
A neobank is a bank that is totally digital: that is, it doesn’t have any branches or large call centres.
These days, the only way private lenders can get any money out there in the market is if they offer short-term lending solutions or ‘mezzanine finance’ (typically a loan secured by a second mortgage or caveat) to property developers.
Normally, lenders will aggregate mortgages with similar credit strength. So, they might have $100 million worth of mortgages at an average charge rate of 4 per cent which they will then sell back to the market at perhaps 4.5 per cent or 5 per cent.
Mortgage insurers are third parties to the banks. The two largest mortgage insurers in Australia, QBE and Genworth Financial, effectively form a duopoly, controlling 97 per cent or thereabouts of the market share.
The bank might only realise 90 per cent of the property’s value, should it take possession of the property and sell it (known as a ‘mortgagee sale’). This leaves a shortfall of 5 per cent of the initial borrowings. In this case, the mortgage insurer pays the difference and the bank breaks even.
the most fundamental difference between a broker and a lender is that the broker offers choice (i.e. products from a number of different lenders) and isn’t employed by or tied to one particular lender. Therefore, they’re more likely to tell you the good, the bad and the ugly. When was the last time your bank proactively called you up and told you that because their competitors are offering a lower rate, they’ve decided to match it and reduce your current interest rate? Never, right? And it’s probably never going to happen. However, good mortgage brokers do this all the time, because they need to retain your business and want to earn referrals.
it’s essential to know your limitations when it comes to borrowing
How do you measure your personal maximum borrowing capacity – how much are you comfortable borrowing? And what happens if you get into trouble and struggle with the repayments?
Assessing your borrowing capacity is a very personal matter. For some people, the thought of going into debt doesn’t create any anxiety at all; these people will happily borrow as much as a bank will lend them. Others break into a sweat at the mere thought of borrowing any more than they absolutely have to. This fear might be justified under some circumstances; however, it’s often more a consequence of a lack of education, knowledge and experience. In other words, if these people sat down, crunched the numbers and really considered the risks involved, going into debt may not look as daunting as they first thought.
Control your cash flow, don’t let cash flow control you!
For a lender, your borrowing capacity hinges on three key criteria:
1. income and expenses, known as ‘serviceability’
2. assets and liabilities, known as ‘security’
3. borrowing history, referred to as ‘creditworthiness’.
Example: Assume a property is valued at $500,000 with a rental yield of 4 per cent. The investor borrowed 80 per cent of the property’s value in order to acquire it, or $400,000. The assessed rental income would be equal to, say, 80 per cent of the estimated 4 per cent yield – as 80 per cent is the average gross rental income lenders will generally use. That’s $500,000 × 4 per cent × 80 per cent, which equals $16,000 per annum. This would be compared to the assessed principal and interest repayments on the $400,000 loan at the benchmark rate of, say, 5.75 per cent, which equals $30,200 per annum. (That’s over a 25-year term, assuming that the total loan term is 30 years, with the first 5 years interest-only and the remaining 25 years principal-and-interest.) Therefore, the applicant must have surplus income of at least $14,200 per annum (being $16,000 less $30,200) to qualify for this loan. However, in reality, if the loan is interest-only, the rental income will come very close to covering the repayments, thereby costing very little.
Most investors prefer to limit their loans to no more than 80 per cent (per property) of the current value of each property. One reason for this is to ensure that they don’t have to pay lenders mortgage insurance (LMI). Mortgage insurance can cost between 1 and 5 per cent of the loan amount:
October 8, 2022
Overall a very thorough resource on Australian property financing and the mortgage industry. Lots of insightful information that assists the reader in understanding how to best navigate the lending space when it comes to purchasing not just your first property, but multiple properties as an investor. Includes a chapter on commercial property finance and its nuances compared to the residential lending space.
There is more detailed information in this book specifically tailored in this topic rather than the original book, Investopoly, which covers shares as well as more holistic financial planning and asset protection. Still, I have taken many notes from this book and will be looking to implement some of the strategies and information highlighted within, including the importance of appropriate structuring from the beginning.
A great companion to his original book Investopoly, but not entirely a required resource. I have subscribed to the authors podcast and have found it to be a quality resource that’s free to listen to and provides detailed analysis into all things wealth creation. His teaching style is very engaging and comes across as quite genuine compared to other services and providers I have observed. Well worth your time.
There is more detailed information in this book specifically tailored in this topic rather than the original book, Investopoly, which covers shares as well as more holistic financial planning and asset protection. Still, I have taken many notes from this book and will be looking to implement some of the strategies and information highlighted within, including the importance of appropriate structuring from the beginning.
A great companion to his original book Investopoly, but not entirely a required resource. I have subscribed to the authors podcast and have found it to be a quality resource that’s free to listen to and provides detailed analysis into all things wealth creation. His teaching style is very engaging and comes across as quite genuine compared to other services and providers I have observed. Well worth your time.
November 1, 2022
Really clear information in this book especially in explaining how the game works.
September 9, 2023
Excellent inputs and strategies on the property investment in simple and clear terms and with examples. Realistic views on property investment option.
June 10, 2021
Fantastic Book, well organised and covers all the bases to help anyone looking to borrow money and avoid the traps laid out by banks to have you as a long term customer. Primary point here is that you should look for an easy way out of the loan should you have the option to do it and save your skin. So impressed that I bought the other book 'Investopoly' which has one chapter relevant to this book in identifying good investment property. I'm re-reading this book for a second time to extract more information for what I highlighted the first time around.
Stuart has taken the time to present the subject and content in an organised way as possible - defintely must have proof read and this book now being an updated revised edition helps! I've also subscribed to his online newsletter, podcast and twitter feed to keep track of any property related podcasts and articles. Look forward to read more articles and books relevant for today.
Stuart has taken the time to present the subject and content in an organised way as possible - defintely must have proof read and this book now being an updated revised edition helps! I've also subscribed to his online newsletter, podcast and twitter feed to keep track of any property related podcasts and articles. Look forward to read more articles and books relevant for today.
Displaying 1 - 5 of 5 reviews