Obtaining finance for a home purchase can be a complicated process, and there are certain criteria that we require borrowers to meet before we will agree to finance your home. This article provides some information on how applications for credit are assessed, giving you a greater understanding of how you can get into a position to have your next application approved.

Here are 5 things you need to know before obtaining your home finance.

1. Serviceability

One of the factors used to assess an application is the judgement on the ability of the applicant(s) to make the finance repayments without experiencing financial hardship. We will consider a range of factors including income, expenses and other liabilities in order to determine whether the applicant will be able to comfortably make the finance repayments, even in the event of a rent rate increases.

2. Loan-to-Value Ratio (LVR)

Another factor considered is the Loan to Value Ratio (LVR). This is the amount you are planning to borrow as a percentage of the value of the property. Any savings the borrower has can be used to reduce the amount being borrowed which will, in turn, reduce the LVR. The LVR is important because if the borrower is unable to repay the finance and we are required to repossess the security property, we will want to ensure that the value of the property provides sufficient equity to repay outstanding debt(s) and ijarah.

In many cases, we will lend up to 75% of the value of the property. If the LVR is higher than 80% mortgage insurance will usually be required. Mortgage insurance serves to protect us against the borrower being unable to repay the finance. The mortgage insurance premium is normally paid by the borrower. When mortgage insurance is involved, the application must satisfy the lending criteria of the mortgage insurer as well as us.

3. Credit history

The credit history of the applicant(s) is also considered. If an applicant has previously defaulted on a loan, has missed a credit card payment, or has been declared bankrupt, this will reflect on their credit history and will be accounted for when the lender is assessing the application.

4. Verification of financial information

Upon applying for finance, borrowers will be required to provide verification of their financial information including proof of income from their employer, bank statements demonstrating savings, and details on other assets and liabilities. We will require such information to ensure that the applicant meets the appropriate finance criteria.

Some applicants, however, may not be in a position to provide such information. For example, those who are self-employed may not have the ability to provide proof of income. For these applicants, a different type of finance exists – low documentation or ‘Lo-Doc’ finance. On Lo-Doc finance, we do not require the same level of evidentiary documentation as with a “fully verified finance”. As the finance is considered a higher risk to us a higher Ijarah rate may apply and maximum LVR limits are lower than those applied to fully verified loans.

5. What to do if you’ve had a finance application declined

While we may decline an application, this doesn’t necessarily mean the customer can never finance from us at some stage in the future. It simply means that based on the applicants’ current financial situation, the proposed purpose of the finance and/or the borrowers’ credit history, we are not prepared to finance at that time. It may be that a prospective borrower needs to save more, borrow less or wait for a pay rise.

After going through this article, we hope that you have gained a better understanding of obtaining finance and that you will be in a better position to have your next application approved.

At Hejaz Financial Services we offer Islamic home finance for your property. Obtaining Islamic home finance isn’t as hard as you think, we take the stress out of planning, budgeting, and paperwork so you can focus on the important finishing touches for your new home. We have helped countless families finance their dream home, and you are no exception.

Learn more about our Islamic home finance here.

Investing in shares

Investing in the sharemarket provides a way of participating in the future profits and growth of Australian and international businesses. In Australia, there are more than 2,000 companies listed on the stock exchange, representing a market capitalisation of $1.69 trillion*.

Risk/return characteristics

Shares are generally considered a high-risk and high-return investment and are suitable for longer-term investors.

Historically, Australian shares have provided long-term growth well above inflation. However, shorter-term sharemarket returns have experienced higher volatility at times.

Sharemarket investors may expect a negative return approximately once in every five years or so, which is why shares are suited to longer term investors. Time greatly reduces, but does not eliminate, the volatility in returns from shares.

Sharemarkets move in cycles, reflecting the underlying strength of the economy, political factors, industry trends and market sentiment. On any given day interest rate and inflation expectations, company profits, dividends, economic growth figures and the rise or fall of our dollar may have an impact on share prices.

Income and capital growth

While shares are primarily a growth asset, they may also provide a good source of income.

Most companies distribute a proportion of their profits in the form of dividends. Companies that pay high dividends tend to be blue chip companies like those in the banking, insurance and retail sectors. Some companies, like those in the mining sector or newer industries like biotechnology, may retain dividends to fund future research, expansion or exploration.

Actual yields may change dramatically from year to year and vary from company to company. If company profits are not growing, dividends are likely to be stable and if profits fall, a company may have to reduce dividends.

Tax benefits

Dividend imputation is the main reason Australian shares are so tax effective. Given companies have already paid tax at the company tax rate, investors can use franking credits to offset the amount of tax they pay on dividends and have any excess credits refunded. The higher the franking level the greater the benefit.

Some companies pay fully franked dividends, with the maximum imputation credit of 30 per cent (equal to the company tax rate). Other companies pay partially franked dividends where the imputation credit will vary depending on the amount of tax they have paid on their profits.

Implementing your portfolio

You can invest in the sharemarket directly or through a managed fund. One of the major benefits of a managed fund is that you can access a much wider range of investments than you can investing directly yourself. Another is that your assets are professionally managed.

Index-tracking traditional index funds and Exchange Traded Funds (ETFs) invest in all or a representation of stocks in a selected index with the aim of producing index returns, before fees. By contrast, many active Australian share funds hold between 30 and 70 stocks, out of a universe of around 200 to 300 securities depending on the index used.

*Australian Securities Exchange. End-of-month valuation, July 2015.

At Hejaz Financial Services, our investment products are build and managed by expert teams with years of experience and deep, human understanding of markets. Learn more about our Premier Islamic Financial Services here.

Whether it’s taking a more active interest in your superannuation, starting to build an investment portfolio, or even trying your hands at playing the stock market, we can all benefit by understanding the language and key concepts of investing. Here’s a quick introduction to investing.

Asset classes

There is a huge range of potential investments out there, and these can be grouped together in asset classes that are based on shared characteristics. There are many asset classes, however we will focus on the 2 most mainstream and major ones shares (or equities) and property.

• Shares give investors part ownership (usually a very small part) in specific companies. The share market sets the value of each share and prices can fluctuate significantly, even from day to day. This price volatility means that, relative to other asset classes, shares are higher risk, particularly in the short term. However, investors expect to be rewarded for taking on this risk by the potential for shares to deliver higher long-term gains than the other asset classes. Shares may also provide regular income in the form of dividends. It’s common to split this asset class into Australian and international shares.

• Property also provides investors with full or partial ownership of growth assets. Income is received in the form of rent and property also has a strong history of providing capital growth. It is common to further subdivide this asset class into residential and commercial property, as these subclasses can have their own property cycles. As property can, at times, fall in value, it is considered a medium to high-risk asset class.

Why are asset classes important?

One of the golden rules of investment is that when seeking higher returns, investors must take on a greater degree of risk. As it relates to investment, risk can be thought of as volatility or uncertainty. Some quality investments may provide a high certainty of a particular return. They are low risk, and the returns they offer reflect this. However, for any given share, we don’t know what its price will be in a week, a month or a year. Prices may be volatile, the return is uncertain, so a share is a higher risk investment. However, that risk can be a positive thing – upside risk – which is the potential for the share to generate a higher than expected return.

Asset classes bundle together investments with similar risk and return profiles. By blending these asset classes together in different proportions – a process called asset allocation – investors can construct portfolios that provide levels of risk and return that suit specific needs. Typically, a retiree may want a portfolio that minimises their risk and provides more stable returns. A 30 year old with an investment time horizon of decades may be happy to take more risk, in the knowledge that, over the long term, growth assets (shares and property) have delivered the highest returns.

This blending of different asset classes results in diversification, which is a critical risk management tool. As different asset classes over and under perform at different times, mixing different asset classes lowers the volatility, and hence the risk, of a portfolio.

As far as returns are concerned, studies have shown that over 90% of a portfolio’s performance is determined by the asset allocation. It’s vastly more important than individual investment selection or the timing of purchases and sales.

Indexing

There are many different indices that track the performance of each asset class and its subclasses. The Australian All Ordinaries Index, for example, follows the fortunes of Australia’s 500 largest companies. The Australian Fixed Income Index Series tracks the performance of higher quality Australian bonds.

Given the importance of asset allocation and the difficulty of picking winning and losing shares or other assets, many investors are content to accept the performance delivered by each asset class. An easy way to achieve this is to invest in index funds. With a small number of these funds, it’s possible to deliver diversification both across and within asset classes, along with any desired asset allocation.

Help is at hand

Of course, there’s more to investing than can be conveyed in a short article, but that’s no reason to delay putting the various markets to work. Our financial advisers can help you understand your risk comfort level, and design an investment strategy that’s right for you.

At Hejaz Financial Services, our investment products are build and managed by expert teams with years of experience and deep, human understanding of markets. We are focused on taking your investment to a whole new level, setting the management of your wealth as our priority.

Learn more about our Premier Islamic Financial Services here.

The foundations of successful investing

This article explains the important foundations of a strong investment portfolio based on 4 principles – quality, value, diversity and time.

Establishing an investment portfolio can be likened to building a home. The most destructive, yet unpredictable predator to the structure of a home is the weather. Even in these most technically advanced days, we are still unable to accurately predict the weather.

Like the weather, the future of the global economy can be the most unpredictable and destructive threat to your investment earnings. But with a carefully built portfolio based on sound foundations, you have a much better chance of weathering a financial storm.

Investment principles

The foundations of successful investing and a strong portfolio rely on four key ‘pillars’ or investment principles. Quality, Value, Diversity and Time.

We are probably all tired of the old line, “don’t put all your eggs into one basket” – meaning to diversify your portfolio – but that is only one pillar on which to rely. The other three are equally important. Forget about just one and you are setting yourself up for a collapse.

Let us briefly explain why all four pillars are crucial to your investing success.

Quality and Value

If we look at the first two pillars, quality and value, it’s obvious this means to look for assets that are expected to provide higher returns relative to their risks. Applying this to shares, quality companies should have a sound basis to their operations and growth; that is, their earnings are not driven by fads. This however, might mean they take time to deliver. Remember that investing in the share market is generally a long-term strategy.

Quality and value don’t always go hand in hand. Quality stocks may trade at such high prices that they offer low initial value or it could be that expectations for these companies are sometimes too high. The key here is quality… the expectation is that they will be around for a long time, not just a good time.

Diversify

This takes us back to diversity. Diversity acts like the scales in a portfolio, providing balance. True diversity in a portfolio gives the investor the opportunity to take advantage of “hot stocks” or asset classes, whilst balancing out the risk with quality stocks and asset classes. It can provide a buffer against mistakes in assessing value because nobody gets it right all of the time. A well-balanced portfolio should be designed to cope with occasional losses.

Time

And finally, the pillar of time applies to the previous three. It can give you the best chance of success. Every market will suffer periodic downturns, however over time the upturn will always triumph. The golden rule is don’t panic and get caught up in the fear and greed cycle. It’s about time in the market, not timing the market.

Past performance is not indicative of future results, nobody can successfully predict the future of the global economy. The best way to set yourself up for investing success is to make sure your investment portfolio is based on the four solid foundations and monitored consistently.

At Hejaz, our investment products are build around the core foundations and is managed by expert teams with years of experience and deep, human understanding of markets. We are focused on taking your investment to a whole new level, setting the management of your wealth as our priority.

Learn more about our Premier Islamic Financial Services here.