Type of Client: Self-Employed Business Owner, Allied Health Professional
Success Factors
Knowing the in’s and out’s of self employed lender policy and understanding the treatment of business liabilities on borrowing capacity.
Identifying lenders that offered fast turnaround times as well as simple settlement processes, given the client only had one week between loan submission and settlement.
Project managing the deal which involved active communicating with the purchaser solicitor, vendor solicitor and vendor agent, to ensure clear timelines and expectations were consistently met.
Situation
The client, a renowned physiotherapist, has purchased an investment property.
Prior to the purchase, he went to two major bank branches both of which advised in writing that he was pre-approved.
However, upon going back with an investment property, both bank branches then told our client they would not be able to proceed due to serviceability failing.
The client then came to us to get a second opinion.
He was in the process of selling one of his investment properties which would settle after the new purchase – he needed a higher loan amount to supplement the shortfall.
Alternatively, his parents were happy to provide a non interest bearing loan which would be repaid once the existing property settled.
Challenges
The client’s business had a business loan which, when included despite other add backs, would cause serviceability to fail. This is the dominant policy applied by lenders to business liabilities.
The client had obtained pre-approvals from branches of two major banks both of which advised they could not proceed due to serviceability.
Due to the late notice of these decisions the client only had one week before settlement was due.
The vendors were unable to offer an extension because they were reliant on this settlement to complete a purchase of their own.
The vendors would issue a notice to complete i.e. settlement must be complete in 2 weeks otherwise the initial 10% holding deposit would be forfeited and the sale withdrawn.
Since the parents were expecting to be paid back, a gift letter stating their loan was non repayable would not be available. On the other hand, if the letter simply declared it was a loan, the lender can assume repayments that would reduce borrowing capacity.
The investment property which was being sold would not settle until after the new property was due to settle so a solution to cover the shortfall was urgently required.
Result
To select a lender with the best chances of approval, we internally assessed borrowing capacity under the two possible treatments of the business loan: (a) repayments included along with company net profit, interest expense add back and depreciation add back; or (b) not included and only the Director PAYG salary included as income.
We found that only the second treatment above (where the business loan was excluded and Director PAYG salary included) would work.
Out of those lenders that could consider this we shortlisted the one with the fastest turnaround time and simplest settlement process whilst also providing competitive rates. This lender was Macquarie Bank.
We de-risked the approval being contingent on the sale of the investment property by presenting a gift letter stating the loan would be repayable only upon sale of the property and two serviceability scenarios – one with the investment property not sold and one with it sold, both of which passed.
Settlement was expedited and was able to go ahead with 7 business days from loan submission to settlement, over the Easter long weekend.
During the whole process we actively communicated with the purchaser solicitor, vendor solicitor and vendor agent so that clear timelines and expectations were consistently met.
