Overcoming hurdles when financing property investment purchases in mining boom areas: Jenna Ford

There are a few issues to financing property investment purchases in mining boom areas.  You may not have run into these before and because the lenders are operating very conservatively at present with their credit decisions it’s easy to be caught unawares.  Get up to speed on the possible hurdles to financing these deals. We'll look at a few of the issues you need to be prepared for and give you tactics below to get your loans approved more easily.

Postcode

Most lenders rate postcodes for the risk they perceive to be associated with these areas. Their credit policy will change where they perceive a postcode to contain higher risks for them.   For example, a small and/or remote town will have a higher risk rating, as its harder for a lender to sell the security at a price that will cover the loan on it should a borrower default.  Some lenders will not lend in postcodes they perceive as a higher risk or will limit the loan’s LVR (level of loan to property value), such as in Moranbah, Queensland. If you intend to borrow over 80% LVR in a mining town then the mortgage insurer will have its own postcode and policies related to it, and these are generally more conservative than those of the lender.

Tactic: Get to know the risk rating of the postcodes you are interested in before you decide it is the place to buy.

Type of security

Stick to more traditional types of security, as unusual securities are rated as higher risk, again because they are harder to sell in event of a borrower default.  Again, there is a difference between the lenders on how they view unusual securities and so you do need to research this if you are considering buying an unusual property.

Brokers are generally well informed and aware of where the windows of opportunity lie for unusual securities, e.g. a large house divided into one-bedroom units or a boarding house – both attracting a fabulous rent return – may be declined as suitable security.  A transportable home may be accepted by some lenders but only at a 70% or 80% LVR loan.

Tactic: Decide the types of security you are targeting and find the lenders who will accept them. If there aren’t any lenders or the lender’s products and policies are not suitable for you then change what you are looking for before you waste time and energy researching properties you cannot obtain the finance for.

Rental returns

“One-industry towns”  have recently been the focus for lenders.  They have viewed the high rental returns often achieved there as unsustainable and therefore risky.  While you, the buyer, may see the rental returns on some properties as hugely attractive, the lenders are worried. A number of lenders have recently changed how they assess these rents when deciding if you can service the loans you apply for.

While it has been normal in the last two years for lenders to want to see long-term leases in place for these properties, it is now common for a lender to only consider 60% of gross rental when they calculate your borrowing capacity on these properties.  This 60% gross rental is then further reduced to 75% or 80% (of the 60%) as a ballpark rental income net of expenses such as agent’s fees and rates.

Tactic: Do not expect that large gross rental income will help in your ability to service a loan in the eyes of the bank.  Ensure you have other regular income (wages, two years of business drawings, other rental incomes) that is high enough to give the lender comfort.

Valuations

Generally valuations are very conservative at present and in mining towns valuations tend to be more volatile as values seem to keep pace with rental returns which also fluctuate with demand. It’s the norm in larger cities to receive a valuation at, or very close to purchase price, however , in mining towns where lenders are more fearful of the boom/bust cycle this may not be the case.

The valuer is all powerful. He can value down a property if he thinks it has an inflated price or high risk factors. That means that if the valuation is lower than expected and you have additional cash you might put into the deal you could still proceed to buy at a lower LVR loan.  This may not always be the case. A valuer’s  notes on risks associated with a property he is inspecting can send a lender scurrying for cover and kill the deal . For example, if the property is close to a mine site that could be considered as polluting, if its access road is a rough dirt road, or if there is little infrastructure  nearby ( town water, public transport, schools).   Again, the lender wants to be sure it could sell that property quickly should you, the borrower default.

Tactic: Look at all properties that you are considering from a lender’s point of view. What is there on the deal and the property that would make a lender nervous or would make the property difficult to sell quickly? Is the mine near the town building its own accommodation for their workers? Is the access to the property steep or rough? Your broker needs to mitigate against these possible risks in his or her presentation of the loan application to the lender.

Valuations again

It is also important to be aware that in the last two years most lenders have swung over to a system of valuation called Valex. The system is designed to put a distance between the valuer and parties who may want to influence the valuers’ independent assessment of a property. It is almost a black box system and can’t be bypassed. It also means that it is difficult to know which valuer has been assigned to a particular job. Additionally, valuers who have wanted to be included in the Valex panel of valuers have had to compete on their service price and are often delivering reports for a low fee. This inevitably means that many valuers are in a rush to do volume reports and may miss some of the features that make your prospective purchase property a good deal.

Additionally,  the valuer may not be a local valuer, but travel a long distance and not be as familiar with the area you are seeking to buy in. With many lenders, the valuer for Mt Isa travels in from Townsville despite the fact that there are local valuers in Mt Is a who know the market there intimately.

Tactic: Check in with your broker to see if there is a suitable lender who does not use the Valex system if you are worried about a valuation ruining your proposed purchase plans.  You can also consider using a lender who will facilitate an upfront valuation so that you can know the valuers estimation of the property value before you go to all the trouble of submitting a loan to that lender.  You can always take the deal elsewhere if the valuation is too low and seek a second opinion.

Investing in mining towns can be done very successfully.  If you do need finance to complete the purchase (as most of us do) then remember when you are researching your purchase to also research the finance hurdles that may apply to your deal. And once again, do the finance application well before you find the property you want to buy.

Jenna Ford is a finance strategist and partner at Chan & Naylor Finance