Assets, how important are they?

Why are assets important to a lender? It’s simple really. The acquisition of assets over a period of a person's life is an indication of their borrowing character. A person who has steadily accumulated assets over their lifetime is likely to display a pattern of increasing net worth and a decrease in debt. This is all a simple matter of common sense when you think about it.

Why are assets important to a lender? It’s simple really. The acquisition of assets over a period of a person's life is an indication of their borrowing character. A person who has steadily accumulated assets over their lifetime is likely to display a pattern of increasing net worth and a decrease in debt. This is all a simple matter of common sense when you think about it.

Take for example an applicant aged 50 years who applies for a loan and lists as his assets one car worth $30,000 and cash in the bank of $20,000. Although he may have a steady income of $80,000 a year the bank will be wary because the picture being painted falls well outside the norm.

One of the best ways to think about this process is to imagine lending your own money to this person. Would you want to know a little more about their life history? Of course you would, and the bank is no different. All they know about an applicant is what is laid out in an application form and apart from name rank and serial number they are left to fill in the gaps themselves.

That is not to say that this applicant would not be granted credit. He may have a reasonable explanation for his situation such as a recent divorce whereby he dispersed all assets to his wife and dependent children and decided to start life afresh. The bank may require proof by way of a Family Court order, and if it can be provided the loan may well be approved.

Assets can also be used as additional security for a lender so that they feel more comfortable in approving a loan. There are other types of assets that the bank will be able to use as security.

Residential real estate property.

Residential real estate property.

Share portfolios.

Cash.

Capital equipment or machinery used in the business.

Fixtures and fittings wholly owned by a business proprietor.

Banks are required to adhere to responsible lending practices as laid out by the National Credit Code which means they should not lend money to applicants who cannot demonstrate the capacity to repay the debt.

Whereas this normally means cash flow sufficient to meet the minimum monthly payments on a loan, banks can also take a more expansive view of this requirement and look at the possibility of the borrower selling existing assets to repay a debt. This means that if the applicant has a strong asset position and can satisfy the bank that these assets can be disposed of to provide cash to repay a loan, they may be prepared to approve a credit facility such as a home loan.

In order to do this however they will want to take a lien on assets to secure the risk. This means they want the applicant to mortgage these assets to the bank.

This is a decision which should not be taken lightly by either party because a bank will be in a strong position to force a sale in the event of loan repayment difficulties. Bear in mind that banks are also required to take a reasonable approach when exercising this right and they should negotiate with a borrower for a reasonable period of time before embarking on this strident approach.

Each of the assets listed above can be offered as security to a bank but the bank will not always allocate the full value of the asset as security. For instance in most circumstances a bank will only lend up to a certain percentage of the value of each asset type. Here is a list of likely limits.

Residential real estate property. 80%.

Commercial real estate property. 60% to 70%.

Share portfolios. 30%.

Cash. 100%.

Capital equipment or machinery used in the business. 10%.

Fixtures and fittings wholly owned by a business proprietor. 5% to 10%.

When it comes to home loans in a company name many banks have a predilection for seeking as much security as possible including a fixed and floating charge over all company assets. This gives the bank enormous flexibility and power because it can force a sale to lower its exposure to the business at any time it sees fit.

Many borrowers see this as a huge and unfair imposition on the part of the bank and you should be aware that even if the bank insists on this as a condition, you can invariably talk your way out of it by simply refusing to do business unless they remove the condition from the loan contract.

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