Sydney’s Credit Mortgage Loan Servicing: Enhancing Profit Efficiency – Project finance is the financing (funding) of long-term infrastructure, industrial projects, and public services without the use of leverage or limited leverage financing. The debt and equity used to finance the project are repaid with the cash flows generated by the project.

Project financing is a loan structure that relies primarily on project cash flows for repayment, with project assets, rights, and interests held as secondary collateral. Project finance is particularly attractive to the private sector because companies can finance large projects off balance sheet (OBS).

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Project finance for BOT projects generally involves a special purpose vehicle (SPV). The sole proprietorship executes the project by subcontracting multiple aspects of the construction and operation contracts. Because there is no revenue stream during the construction phase of new construction projects, debt service only occurs during the operational phase.

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For this reason, teams take a lot of risk during the construction phase. The only source of income during this phase is generally under a concession agreement or power purchase agreement. Because there is limited or no recourse to project sponsors, the company’s shareholders are often liable up to the extent of their shares. The project remains on the balance sheet for both the donors and the government.

Not all infrastructure investments are financed by project finance. Many companies issue traditional debt or equity to undertake such projects.

Project debt is usually held to a small amount of financing that is not included in the balance sheet of the relevant shareholders. This reduces the impact of the project on the cost of existing debt to shareholders and the volume of debt. Shareholders are free to use their debt power for other investments.

To some extent, the government can use project financing to maintain project debt and off-balance sheet debt to replace microfinance. Fiscal space is the amount of money a government can spend beyond what it has already invested in public services such as health, welfare and education. The theory is that strong economic growth will bring the government more money through additional tax revenue from more people working and paying more taxes, allowing the government to increase spending on public services.

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When a company defaults on a loan, the financing gives the lenders full claim on the shareholders’ assets or cash flow. In contrast, project finance defines the project company as a limited liability SPV. Lenders’ assistance is therefore limited primarily or entirely to project assets, including completion and performance guarantees and bonds, in the event that the project company defaults.

A key issue with leveraged financing is that situations may arise where lenders may use some or all of the shareholders’ assets. A willful breach on the part of the shareholders may give the creditor an opportunity to recover the assets.

Applicable law may limit the extent to which a shareholder’s liability may be limited. For example, liability for personal injury or death is generally not subject to exclusion. Non-performing loans are characterized by capital expenditures (CapEx), long loan periods, and uncertain income. Underwriting these loans requires financial modeling skills and a sound knowledge of the underlying technical area.

To prevent deficiency balances, the loan-to-value (LTV) ratio is usually limited to 60% for non-subsidized loans. Lenders impose high credit standards on borrowers to reduce the chance of default. Non-recourse loans, because of their higher risk, have higher interest rates than mortgages.

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If two people are looking to buy a large asset, such as a home, and one gets a subsidized loan and the other gets a non-payment loan, the steps the financial institution can take towards each borrower are different.

In both cases, homes can be used as collateral, which means they can be seized if a borrower. To recover costs when borrowers default, financial institutions can try to sell homes and use the sale price to pay off the associated debt. If the properties sell for less than the amount owed, the financial institution can only go after the debtor for the repossession loan. The debtor and the loan cannot be followed by any additional payment beyond the confiscation of the property. Along with your loan to value ratio (LVR) and credit scores, you’ll also hear the word “serviceability” come up. But what does serviceability mean, and why is it so important?

When a bank calculates your home loan performance, it’s essentially a stress test—testing your ability to repay the loan. They do this by looking at your income and expenses (among other things) to determine how much you can afford to pay comfortably.

Based on this information, banks will generate your debt service ratio (DSR). This is how much of your monthly income you can expect to go toward “service” or paying off your debt, expressed as a percentage.

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While there is some flexibility when setting performance standards, banks will generally err on the side of caution. This is because the Australian Prudential Regulation Authority (APRA) holds banks to strict standards to ensure that they do not issue loans to borrowers who cannot repay them.

When determining your ability to qualify for a home loan, banks will take your after-tax income and expenses and any other debts, such as credit card debt or other mortgage debt.

Banks will also add a 3% buffer to your home loan interest to accommodate any future tax hikes. That means if you sign up for a 500,000 loan with an interest rate of 5% p.a., you will be tested on your ability to pay that loan at 8%.

Prior to July 2019, lenders would use a minimum interest rate of 7%, but this was deemed unnecessarily high and adjusted to better reflect current interest rates. Today, lenders are advised to add a maximum of 3% to the loan amount.

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Your annual income is very high on the list of factors that lenders look at. Basically, all they want is a steady income over a long period of time. But how your income is assessed is not always clear, especially if you work overtime or are self-employed.

Those working in the emergency services can generally expect overtime pay to be included in their performance appraisals. But for jobs where overtime payments are less common, or less important as part of the job, lenders may consider them at a reduced rate.

The restrictions will apply to any income you earn from second jobs. For example, if you are self-employed or work in the gig economy to supplement income from your main job, any income you receive can only be considered if you have held the job continuously and for a certain period of time.

Regarding income from rental properties and investments, lenders will use a buffer in response to any period of vacancies or market fluctuations, meaning that any income you receive from your portfolio will be partially assessed.

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How much money you can borrow for a mortgage will ultimately depend on your lender and the criteria they use to assess your performance. However, there are still strategies you can take to put your best foot forward.

Lenders don’t want their loan to compete with other claims on your hard-earned income, so the more financial wiggle room you can show, the better. Otherwise, you may be looking unnecessarily at a mortgage loan red flag.

The most obvious way to increase your home loan service (although not the easiest) is to increase the amount of money you receive. You can do this by asking your employer for a raise, applying for a higher-paying job, or looking for a second job.

Lenders will review your spending habits three months before you apply for a home loan, so if you want to increase your creditworthiness, you’ll need to control any unnecessary spending and show that you’re responsible with your money.

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If you have any existing debt, try to pay it off as soon as possible. If you’re not sure where to start, identify which debt is adding up the most interest and deal with it first.

When determining your service, lenders usually calculate your minimum monthly payment by 3% of your approved credit card. High credit limits don’t translate well, so try to limit them where you can. And if you have any unused cards it’s a good idea to cancel them as well.

Whether it’s a spouse, parent or friend, you’ll have an easier time applying for a home loan with someone else than if you’re borrowing alone.

If you’re thinking about taking out a loan, use a loan calculator to get a rough estimate of your borrowing capacity based on your current income and living expenses. And if you’re wondering where rates stand now, check out our home loan comparison page to get an idea.

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