Broker FAQs: Why Did the Bank Say No?

As a broker, when a client presents you with an 'out of the box' deal that the bank has declined, it's incredibly useful to understand exactly why they've said no, so that you can find an alternative lending solution that suits your client's needs.

Truthfully, there are a number of reasons behind a bank's decision to reject a loan, which vary not only from bank to bank, but also in reaction to market conditions and the credibility of the borrower.

So, why did the bank say no?

We answer this with some FAQ's, as well as provide insight into what you can do to help your client when this happens.

1. Your client has bad credit

Life is unpredictable, and sometimes circumstances that are out of your client's control can mean that they miss a few payments and before they know it, their credit rating is negatively impacted. Anything from going through a divorce, a bad business transaction or even unforeseen events like fires, earthquakes or COVID-19 can leave a credit rating looking worse for wear.

Typically banks have cookie-cutter rules around credit scores and what they are and aren't willing to lend to. A credit rating can range from 0 to either 1,000 or 1,200 depending on the credit bureau calculation, and banks will only be looking to lend to borrowers who have a 'good' to 'excellent' rating.

It's also important to know that bad credit scores last for five years, so even if your client has been on their best behaviour and making payments for four years running, they'll still be impacted by their credit history. That means that often we meet people who are struggling to get finance from the banks, even thought they're 'low risk'.

2. Your client wants to buy a high LVR investment property

As you'll know, LVR stands for 'loan to value ratio', and is essentially the ratio of credit your client is looking to take out to purchase a property, versus their down payment or equity in the home. LVR is calculated by dividing the amount of the loan by the value of the property. For example, if the property is worth $250,000 and you have a deposit of $50,000, the LVR will be 80%. ($250,000-$50,000) ÷ $250,000 = 80%.

It goes without saying that the banks are looking to lend to low LVR property investments. The more equity your client has in the home, they less risk the bank is taking in lending money to them. Historically, investment property restrictions have also required a higher LVR in order to buy, although currently due to COVID-19 this restriction has been lifted, it's likely to come back into play soon.

If your client doesn't have enough equity in a property, the bank is less likely to give the green light and they may need to look for other solutions.

3. Your client requires open bridging finance

If your client has found themselves in a situation where they've discovered their dream home or investment property that they want to buy, but they haven't yet sold their existing property and secured the funds to make an offer, they may look to find 'open bridging finance' to, quite literally, 'bridge the gap'.

Bridging finance is a short term solution and during the loan period the borrower pays their current mortgage, plus interest-only on the new house – subject to the bank’s approval. Once the existing property is sold, the bridging loan will be paid off and your client can refinance accordingly.

However, banks consider this manoeuvre risky business, as there is no guarantee that the home will sell within the  open bridging period, meaning that your client might be stuck covering two mortgage payments. There are a lot of unknowns and variables, so banks have been known to steer clear of taking the risk and might say no on this basis.

4. Your client is interested in a large development or construction deal

While large commercial development or construction deals (in the millions, all the way to billion dollar deals) can be lucrative for both the developer and the bank, there are also so many variables involved in lending that especially in uncertain times, banks are reluctant to take the risk. In fact, a recent interest.co.nz article claimed that commercial property has historically been a source of significant credit losses for banks.

Actually, this significant adversity from banks to lend to developers has meant that there has been a huge upturn in the past few years (up 16% in 2019) toward non-bank lenders as an alternative source of finance.

In essence, the banks aren't willing to lend to big, risky developers anymore - even if it could be lucrative for all parties in the future.

5. Your client wants to pay a tax debt

If your client owns a business that has failed or there is an outstanding GST debt that they're no longer able to pay, sometimes the only way to clear the debt is to take out a short term loan. The problem is, as a rule of thumb banks don't typically like to lend cash to pay off tax related debt, so your client might find themselves running out of options quickly.

In this scenario, a non-bank lender would be able to use collateral such as a property to secure a loan and clear the debt - a step banks usually don't want to take.

What can you do for your client when the bank says no?

A 'no' from the bank doesn't have to be the end of the road for your client. Banks are historically risk averse and run a tight ship when it comes to lending. When this happens, as a broker it can be easy to look at a deal and say no as well.

After all, if the bank said no, why would anyone else say yes?

Actually, there are many ways that non-bank lenders such as Southern Cross Partners can help. We're able to offer loans to help your clients, we go through our own qualification process to ensure that  development or construction deals are safe for our investors to place money in, and are willing to look at the whole picture of a persons credit history or circumstances before making a decision.

We can help you turn a no into a yes and make your client one happy borrower. All you've got to do is ask!