The scenario
I called an old acquaintance to say hello, and out of this conversation came a mega deal with a refinancing opportunity involving $4.5m in loans. However, every opportunity comes with a challenge, and this one had more than a few.
The clients were two brothers who owned eight properties altogether.
Brother A owned 100% of the title of one owner-occupied property and two investment properties. Brother B owned 100% of the title of one investment property. The other four properties were jointly held by Brothers A and B with 50/50 title ownership. Brother A wanted to refinance his owner-occupied property and two investment properties and take 100% ownership of one of the four jointly held properties and then refinance.
Brother B wanted to refinance his investment property and take 100% ownership of another of the four jointly held properties and then refinance.
Both brothers wanted to refinance the remaining two jointly held properties.
The overall objectives were to simplify the loan structure, achieve positive servicing, refinance at the best rates, minimise repayments and cashout.
The biggest challenge these clients were facing was to service their loans (held in their individual names or jointly) with their individual incomes.
For serviceability, we had to find a lender that would take the brothers’ share of the liability based on title ownership, as long as the other party to the loan was paying their share of the debt.
There were other issues. The wife of Brother A was a casual employee who had only started her job four months prior, and we needed her income to help service the loan.
Additionally, the wife of Brother B was self-employed, and her current income for financial year 2018/19 was a lot higher than it was in financial year 2017/18 as she had picked up some new contracts. We wanted a lender that would accept her higher 2018/19 income rather than taking the average.
Both brothers had credit cards and car loans, which made servicing very tight.
Just by refinancing and restructuring their loans, the clients will save over $10,000 in interest every year
LVR also posed some problems. One of the properties was worth $620,000 and had a mortgage of $550,000, meaning an LVR of 88.70%. Due to the high-risk rating/restriction, we had to make it an 80% LVR.
The solution
We spoke to a few lenders regarding common debts. We found that Commonwealth Bank and St. George had a common debt reducer policy, which meant it would take the actual share of debt as long as we could prove that the other party was paying their loan on time.
The CBA product, Alternate Servicing with Related Party, required that we prove the other party was paying their share of debt by providing six months of loan statements. The other party also had to sign a statutory declaration.
In terms of casual employees, we spoke to quite a few lenders that would accept income after just four months’ employment. CBA also has a policy of accepting casual income after four months. This made servicing for Brother A quite comfortable.
For the self-employed income of Brother B’s wife, we were looking for a lender that would accept current financial year returns so we could use her higher income from 2018/19.
Again, CBA and ANZ were both willing to accept this. However, we chose CBA as they ticked all the other boxes.
To make servicing work for the clients, we had to reduce their credit card limits, and Brother B had to pay off his car loan.
To resolve the LVR issue we had to cross-collateralise one of the properties with another that had higher equity, in order to bring the overall LVR to under 80%.
The takeaways
This was a very complex deal. After speaking to many banks, we realised that each had one or two issues. Not many banks do common debt reducers. We had to find a lender that would take the actual debt shared between two applicants. We mapped out all the problems and devised a list of all the lenders and ticked or crossed which problem each one solved.
We found that CBA ticked all the boxes and we were able to refinance all the clients’ loans with them, which aggregated to a total loan amount of over $4.5m. Just by refinancing and restructuring their loans, the clients will save over $10,000 in interest every year.
We have very satisfied customers as they had previously struggled to find the right broker who understood the complex structure and could find an amicable solution. We have been referred to their friends and family and made them clients for life.
Shail Wadhwa
Senior lending specialist,
Your Finance Advise
