Real Estates: Mistakes To Avoid In Property Financing: Using bank financing to your advantage

Juliet Risdon is a Director of JML Property and a property investor. 
Having established the company in 1994, JML Property offers Investment Property & Homes. It specializes in managing properties for owners and investors, and providing attractive and comfortable homes for tenants.

Despite the recent global ‘hiccups’, banks are in business, and they make money by loaning money.
As a sweeping generalization, banks want to be satisfied on 4 levels in order to grant a loan;
• Who are we lending the money to ?
• What is the money for ?
• Can they pay the money back ?
• What happens if they don’t (pay the money back) ?
Bearing this in mind, when you buy a property you will almost certainly need help from the bank. Here are a few of the pitfalls that can easily be avoided when you are looking for financing.

1. Looking for a property without being pre-approved.
Talking with banks ahead of viewing properties is highly recommended. If you don’t have an idea of how much financing you can raise from the bank, making an offer on an apartment with any confidence is very difficult.
When you talk through your finances with the bank ahead of time, you will want to know about the term of the loan (how many years), the interest rate (what they are charging to lend the money), and the general conditions of the loan (can it be cancelled by the bank at any time etc etc ?)

2. Choosing a lender because they have the lowest rate.
The interest rate is important, however we have to consider the overall cost of the loan.
Pay close attention to the loan fees, and make sure that you are comparing ‘apples with apples’.
For example, banks quote lending rates in relation to the ‘prime’ rate. Some banks may offer you ‘Prime -2%’ and others ‘Prime -2.5%’.
However, the figure that you want to establish is the actual loan rate. In other words, what does prime -2% translate to ? Is it 3% ? In our experience, prime rate varies from bank to bank by 0.25%.

3. Choosing a lender because they
are recommended by your Property Agent
We recommend shopping for a loan with at least three banks before making a decision.
The banks can compete for your business, and each bank will have its own cycle, its own agenda and its own lending policy at the time.

4. Signing documents without reading them.
Do not sign documents in a rush.
We suggest asking the banks for al documentation ahead of time, and then either reading it yourself or asking your lawyer to read through the terms and conditions.
This way, you can review the points and have questions answered in a timely manner.
Do avoid trying to read all the documents during the closing. There is rarely enough time to do that.

5. Trying to avoid using the bank
Even if you do not require financing, we ALWAYS suggest that you borrow something from the bank.
Why ?
Because the banks will not loan money on a property that has a legal issue, or does not have proper legal title. In effect, the fact that the bank will loan money on the property is a good double check that it is legally sound.