This transcript was generated automatically and may contain small errors.
Every lender is going to service a loan differently. So if one lender says no, that doesn't mean anything. Just because it's grown a bit doesn't mean the cycle's over. Fundamentals need to change for the cycle to be over. I think it's definitely going to be that sort of front-loaded effect where people who do get in first, they're the ones who experience and generate that wealth earlier.
Property, as much as we like to say it's the game itself, property is actually the game of finance. On the Property Nerds show, we love mixing it up. And this time, it's not with guests. It's actually with Adrian and Jack, the co-hosts here of the Property Nerds. We're talking finance mistakes.
In fact, we're talking about three mistakes in the finance world that we want to dive into that you've got to avoid. Now, the cool part about this episode, though, is we give you a bonus fourth one. So stay till the end, which means, like, I've just called it three finance mistakes in this episode, but actually it should be four. But you get the point. Let's have a bit of fun getting casual in this chat, catching up with Jack and Adrian, having a bit of fun in this chat.
Tune on in. You're going to learn some of the mistakes that people make in the banking world and how brokers have helped people get ahead and avoid them, but also real stories. Every one of these mistakes is equipped with real stories for each and every single one, from clients to team members, making sure we can leave you in a position to avoid making these in your future. Check it out. Nerd alert!
Property Nerds, the home for data-driven property investors, where we uncover Australia's hot and cold markets, latest headlines and trends. Well, we're back in again, gents, for another episode of the Property Nerds podcast. And today's another finance special, hence why we've got this man in the middle. Got the hot seat today, mate. Happy to be here, mate.
Well, finance mistakes. I think this is a good thing to talk about today because we want a whole bunch of people listening in to stop making them, right? And when it comes to finance mistakes, before we get into those, there's some events that have been taking place recently, and one of them is interest rates. Interest rates coming down in August, Jackie. Good news for repayments, good news for borrowing capacity.
But me and you were chatting offline before, and you're like, Arj, it's not always good news in a few areas, and I wasn't sure what you meant. What are the banks doing that makes you feel like it might not be good news or there's some tricks being played? They're very sneaky, mate. They're very sneaky. So this came up when we had a client who we had a deal package for him, ready to go.
We had a pricing approval done. It was ready to go, right? And they said, oh, I think there's going to be a rate cut. I just want to hold off until that rate cut comes in. And I've seen this before.
And basically said to the broker that I was dealing with, I said, look, if they wait, because what happens? The lenders do a pricing request, and they'll give you like a pricing discount of, you know, their base rate is 9%, and then they'll give you a 3. 2% discount, right? So you get that pricing request discount. And, you know, just for example, to give you a 6%, right?
Then the client said, oh, let's wait. We don't want to do any application until the rate cut comes in. We just want to see what happens. I said to the broker, I was like, you know, that's going to shoot him in the foot, right? Because the lender, you think that the 0.
25% gets passed down automatically, and everyone assumes that that's the case. But when they've got discretion on the pricing discount, they don't pass down the full 0. 25%. They do for their existing book, and they say it's for new-to-bank customers as well, but they just slightly, they ever so slightly pass down like 0. 22 or 0.
20, and that client paying an extra 0. 03 as a result of that. That's not much, but it's the principle. Yeah, like it's just so frustrating, man. Like the RBA, nothing changes for them.
The cost of money is the same, but they don't pass on the full discount to new-to-bank customers. Okay, so let me play that back. Like give me an insight if I'm hearing this right. They gave you a special pricing request of 1%. Yeah.
And then maybe you're thinking, well, 0. 25, and this might not be the exact same scenario, but another scenario like it, 0. 25 means that now your total discount is the 1% plus the 0. 25. Yeah.
But then you're saying the banks have the power to basically go, we're changing your discount approved to 0. 75. Yeah. And then you get another 0. 25 because RBA, and you're back to the same 1% you always had, whereas if you had the 1% discount approved, settled the loan, then a 0.
25 came on top because they can't go back on a pricing request if the loan's settled, they would then now make it 1. 25 off total. Yeah. Wow. So they have the discretion to change how much of a pricing discount that they give you, and because it still looks good, clients don't really know exactly what the best rates are across the board, but some lenders that just have a carded rate, they don't have a pricing request, they're the ones that their rates are actually really sharp right now, but the lenders that give you a pricing discount, they're the ones that are playing those sneaky tricks, and they're actually creeping up in terms of interest rates.
Well, I mean, because we're in the variable world and fixed rates don't last long in Australia, unlike other countries like the USA, slap on a 30-year fixed rate at like two point something, they have, you know, like I was in the head office, right, of CBA, and there was a whole like floor of pricing specialists. So, you know, there's dollars in the game if you've got a floor of pricing specialists working on stuff, right? Like they're working through things there. How many of these are you kind of seeing within lenders who are not maybe passing this on, or are you seeing more of them doing it as more subsequent cuts come along as well? Yeah, I think I see it happen at least once every single rate cut.
There's always a client that says, oh, let me wait. You tell them not to, the downsides of it, we've seen it before, doesn't matter. I just want to wait. Okay, no problem. So there's always one, and it's a mix of the, because not all banks have a pricing system like that, but the ones that do, they'll say that they pass it down for existing clients, but their new to bank clients pricing is always going to be different.
Yeah. Now, we've got three mistakes we wanted to cover off. Obviously, interest rates being one in terms of just what's happened recently is a big event. But before we jump into the three mistakes, some big events happening in the finance world or likely to happen in the world of first home buyers. Yeah.
October 1st, first home buyers, unlimited placements, no income caps, and substantial rises in price caps. If, say, we use a first home buyer example, yeah, the price cap's gone up to 1. 5 million for New South Wales, but if we use an example of a first home buyer at 800,000, where I believe stamp duty is waived up until that point, that means not only did they get a stamp duty waiver at 800, but they paid no LMI, irrespective of the income and unlimited places. So hypothetically, if someone went out on their own and purchased an 800K property or 799 property in New South Wales, they would only need 42. 5K if you're looking at lawyers, piston building, and a deposit.
Anyone who thinks that that's not going to increase prices, you're out of your mind. It's a massive difference in terms of where it was, like the price cap was like 800 or 900. Now it's gone up to 1. 5. That's, I mean, so many more markets are open.
And we were so used to many years of just saying, oh, there's 10,000 spots. There's 10,000 spots. And now there's unlimited spots. So I think the big thing was not having an income cap. It was so unfortunate to see people trying to get into the market in their mid-30s, like earning as a couple, just over 200K with kids, and the fact that they don't qualify for the scheme.
So for those people now, they're in. And then other high-income earners, like we've got a couple of clients that are up above 200K, single applicants, they wouldn't qualify. They now do. And to give them a budget of 1. 5, I mean, that's a lot to play with.
And that's like, yeah. How much in LMI savings? Are we talking 40, 50? Oh, man, at least 45,000. Wow.
Up to the full 1. 5, 45,000. And you know, the crazy thing is, even if, say, someone else thought LMI is cost of doing business, I'm just going to pay it. I'm ready to go. I'll find a unique lender that puts it into my loan or something and takes it up to 98%, spread it out over I reckon, like, no, you're joking.
But I think, like, hearing that mistake, no means no, what categories do we place it in? Credit's one. Servicing, is that another? Like, where are the other places you see the no's? Yeah, servicing.
Like, every lender's going to service a loan differently. So, like, if one lender says no, that doesn't mean anything. Yeah, so different policies, different way of verifying income. So, yeah, a lot of different options. Well, to me, I think that screams this out.
It's like, if you get a no, one more opinion, one more check. Yeah. I mean, sometimes we get people call up and they've been told no, it's because they're unemployed. They're, like, 65 years old. It's like, okay, well, no one's going to give you a mortgage.
Like, that's an extreme case. Extreme, right. You can't fix that? You can't fix that. Why not?
No, look, I think that's a big one in terms of just second opinions. That's the big take out of this. Like, when you hear this, if you're seeing a mistake or feeling like, if you're seeing a clear mistake, it's this. I went in, I got told something, I just thought, yeah, okay, I'm not going to do anything. Like, this is important wealth building, deposit saving, roof over your head in the area that you want to be in type decisions.
Like, don't let one no just be that and don't make that mistake. Now, mate, I used to be in the banks and there was a second mistake that almost all of us used to make in the banks, but without knowing. Still do, but without knowing. Yeah, that's the important part. That's the important part.
No banker, you know, got taught this, that this was the wrong way. All is forgiven, mate. All is forgiven. Thank you. But at the banks, one thing that's really common is cross-collateralized loans.
Ooh, we're now in one mouthful. I just got that three, I got that wrong three times today. Cross-collateralized, oh, just say cross-call. Cross-call, we're going cross-call? All right, done.
So, cross-call. Yeah. You know, our school side note, my school in New Zealand when I went to high school, it's called Wellington College. We used to call it call, call for short. There you go, cross-call.
There you go. Okay, so cross-call loans, what does it even mean? Why is it a big mistake? Well, cross-collateralizing loans and properties is basically what it is. So, typically, you would want to separate the securities.
So, if you've got three or four properties, you don't want to have them all crossed and have all your loans kind of tied together. So, each property has its own loans for own things rather than I've got 500K equity across three properties. Let me just take one loan that ties them all up and gets me the loan. Yeah, yeah. So, this particular client had that issue.
They had a cross-collateralized issue, but they also had like the debt apportioning was way out of whack. So, when we're dealing with a client, we like to understand the debt that they have and the purpose for that debt because the purpose for the debt is like from a tax deductibility point of view, you need to know that. And Adrian's one of the best clients for that. Like he keeps track of where the debt went for what property, when. If every client did that, honestly, if every client did that, like I want to implement something that we can try to help the clients keep track of it ourselves.
But this client had like a 900K loan attached to a property he purchased for 600K. It's like, so you're claiming interest on a property that's, it's not for that property. So, technically, the accountant should pull them up for that anyway. But if accountants just- It doesn't make their life easier, right, from the accountant? It makes their life hard.
No, and you know, so cross-collateralizing is one thing, right? And a lot of banks, like when you go direct to the bank, they're not actually trained on how to uncross-collateralize loans. Like I've had clients that come from the bank and they're in finance writing other people's loans and they're like, oh, but don't we have to cross-collateralize it? It's like, no. See, that's the point there.
In no situation. We didn't know that. We were in the banking days. You're actually trained to cross-collateralize their loans and properties because it's harder for them to refinance just one property. It's to keep them sticky, to keep them complicated.
Like, no, no, no, we'll manage all this for you. Like, don't take this property out. We'll do all this for you. And it's like, so when you want to refinance one property and something's cross-collateralized, they have to do what's called a partial discharge, not a full discharge. So the partial discharge means that, you know, you could have sold that property, right?
Maybe you, say, for example, you've got four properties, right? You lose your job, you need to sell one, right? It's a partial discharge. You go to the bank, say, oh, I didn't know, I'm just selling this property, I'm keeping these other three. They actually, during the partial discharge, they actually do an assessment to see if you can still make repayments on the other three properties that are going to remain.
And they're doing all the valuations. Yeah, otherwise. So they have to check to make sure that the loan is still in a good spot when you get rid of one. So it's not a full discharge, it's partial discharge. So if you've got into trouble, you've had medical issues or what have you, if your property is cross-collateralized and you just want to sell one, the lender can say no.
It's like, oh, too bad, you can't sell it. Or at least you need to not use your money for your bills anymore. You need to use your money to clear down the loans on these other properties. Or sell all of them. Or sell all of them.
Or sell more than one, right? Because in a sale, you've committed to a sale, you're past the finance clause, someone's buying it. And if you can't settle because the lender's not releasing it, that's because they got the wrong advice and it was cross-collateralized. And the bankers aren't trained to do the opposite because it makes for a... Look at this.
I mean, here's why in the banking days we were there. This is what there was... It's one documents from the printer. Yeah, yeah. That's it.
For all day long, trying to print 10 different properties. It's the same for us. It's the same for us. If we got a property, a guy that had nine properties, we could cross-collateralize everything. It could be easy for you.
One application, one deal tile to look at, one form to sign. But you're doing it the harder way because it's the right thing by them. No, we do nine separate deal tiles, nine applications, could all be with the same bank. It doesn't matter. We're not cross-collateralizing anything.
Yeah. See, so we didn't know otherwise. We just went in there and did it. And also, the banks thrive in speed as their competitive advantage. I went into the branch two hours later, went out for pork roll, had an iced coffee, came back, and my loan's approved.
Yeah. So what I'll say about that is that going direct to the bank versus going to a broker, going directly to the bank, they don't have best interest duty, right? Brokers are looked at with such scrutiny. It's unbelievable. And then banks can just do whatever they want, basically.
You have to recommend multiple people. Yeah. You have to show that you've done it in the best interest for the client, and you can be pulled up on it afterwards to see if you have or have not. They don't have any of that. Wow.
Now, I'm not, by the way, doing a bank versus broker thing here. We are now. I guess I'm just trying to say from the other side why they were, but I can see why you shouldn't. Yeah, 100%. I think that's such an important part.
Now, mistake number three. We talk strategy all the time, Adrian. Property strategy is one thing. Finance strategy. People don't have finance strategies.
They have property strategies, but they don't have finance strategy. Could you talk about an example where a customer was about to go down that journey and go, all right, more property purchases, here we go, but then you're like, hold on a minute, let's talk finance strategy. There's two parts of that where we had to go, hold on a minute. So for this client, about four or five years ago, they had two properties earning good money. They were going to go down the path of buying off the plan, house and land packages, units and stuff like that.
They didn't know any better. They were trusting good marketing and all that. Pulled him aside, said, look, mate, I like you. You should definitely speak to a buyer's agent. So the rest is history, mate.
From there, quickly got three properties. We're now in a position where he's just sold three properties and because of the capital that was generated from those investments, he's still keeping two and he's got the capacity to get a $3 million commercial in a trust, positively geared from day one.
