Recent shifts in the banking sector’s approach to lending could necessitate strategic adjustments for property investors. Here, we delve into the ramifications of these lending changes on your investment capacity and discuss strategies for moving forward effectively.

Understanding the Changes

The Australian Prudential Regulation Authority (APRA) has mandated that Australia’s major banks bolster their capital reserves. This measure, aimed at fortifying banks against potential mortgage losses, was part of a broader revision of banking and mortgage lending policies initiated in December 2014.

This directive stems from concerns about the rapid expansion of lender investment portfolios, notably in the Sydney and Melbourne markets, where property prices have surged. In response, banks have hinted at passing the cost of these additional capital reserves to consumers through higher loan interest rates and reduced dividend payouts. Analysts speculate that mortgage rates could rise by up to 0.65%.

Immediate Impacts on Borrowing

The banking sector’s response has been swift, with repercussions for investors including:

• Increased Interest Rates: Specifically targeting investors.
• Phasing Out Interest-Only Loans: Shifting towards Principal and Interest (P&I) loans for new investment borrowers.
• Revised Loan Serviceability Assessments: Using a benchmark rate of 7.5% for evaluating borrowers’ ability to service loans, irrespective of current interest rates.
• Lower Lending Value Ratios (LVRs): Certain lenders have already reduced LVRs for investment loans.
• Restrictions on SMSF Loans: NAB and ANZ have ceased lending for residential property purchases through Self Managed Superannuation Funds.

These developments are indicative of a broader tightening of credit, particularly for those banks that have previously pursued property investor business aggressively.

Impact on Property Prices and Investment Strategies

The long-term effects on Sydney and Melbourne’s property markets remain to be seen. However, investors, particularly those concentrated in these cities, may need to reconsider their strategies. The reassessment of serviceability and debt levels could constrain further portfolio expansion, especially using high LVRs.

For emerging investors, the path may grow steeper, requiring larger deposits as banks demand more substantial equity positions. Additionally, those with preapproval should verify their standing, as banks may renege on prior agreements given the changing lending environment.

Strategic Recommendations

Investors should continue seeking properties that promise both cash flow positivity and capital growth potential. Brisbane has emerged as a compelling market, offering relative affordability and growth prospects as investors search beyond Sydney and Melbourne.

Those with significant deposits and robust incomes might weather these changes without drastic impact. However, caution is advised, particularly regarding the inner-city apartment sector, where a surplus of similar properties could depress values.

Consider the case of an investor facing settlement on an off-the-plan unit initially valued at $500,000, with a $50,000 deposit. With banks retracting from 90% to 80% LVRs amidst falling property values, the investor may confront a significant shortfall at settlement.

Moving Forward

As the lending landscape evolves, careful planning becomes paramount. The type of investment property you choose now can significantly influence future borrowing opportunities.

For personalized advice on navigating these changes and selecting suitable investment properties, contact us at 1300 781 824 for a no-obligation discussion.