Some significant recent changes in the lending landscape for banks may necessitate some important strategic changes for property investors.
Below we look at how the key changes are already impacting borrowing, and consider what they mean for your capacity to invest in property – and how this might affect your strategy going forward.
What are the key changes?
The Australian Prudential Regulation Authority (APRA) recently told Australia’s leading banks that they must hold bigger capital reserves as a buffer against losses on their mortgage books. This is part of its major overhaul of banks and mortgage lending policy, first announced in December 2014.
One of the reasons behind these changes is concern over lenders growing their investor portfolios by more than 10% per annum, particularly in relation to the growth of property prices in Sydney and Melbourne.
The banks have responded by saying that they will pass the cost of raising more capital onto customers – with higher interest rates on loans and lower dividend payouts. Many analysts warn that this may raise mortgage lending rates by as much as 0.65 percentage points.
We are already seeing some of the knock-on effects of the changes as some banks have reacted quickly. In summary these changes are:
- Higher interest rates for investors.
- Lenders starting to remove interest-only loans for new investor borrowers, instead offering only Principal and Interest options.
- Lenders changing the way they assess the way borrowers service loans: rather than using ‘current” interest rates to check serviceability, they will use a benchmark rate of 7.5% (currently) on a P&I basis.
- Lending Value Ratio’s (LVR’s) reduced by certain lenders for investment loans.
- NAB and ANZ are no longer lending to buy residential property in Self Managed Superannuation Funds.
We already know that lending policies vary between banks, but it looks like those lenders that have been aggressively chasing property investor business are pulling back a little as a result of the changes.
The latest figures from March show that banks had grown their investor loan business by 6.4 per cent, and it will be interesting to see whether the next release of figures from the Australian Bureau of Statistics indicate this ‘reigning’ in policy.
Will it start to affect Sydney and Melbourne property prices? More importantly, how will it affect your investment strategy?
How will these changes affect you?
The extent to which these changes affect you will depend largely on your present strategy and how your current portfolio looks.
If you‘re an established investor who has focused largely on the Sydney and Melbourne property markets you will probably want to think about making some changes.
The banks may start to reassess your serviceability and current debt level and this may reduce your borrowing capacity. This will reduce your ability to grow your portfolio using high Loan to Value Ratios.
For investors still trying to establish themselves, life could also be harder. Larger deposits may be required by banks, meaning you need more savings or equity in your home to climb the property ladder.
And for those who already have preapproval, there is a chance that the agreement will not be honoured if the property sale is agreed. You may want to check beforehand with the lender.
So…what should you be doing?
- If you have been looking for affordable and established cash flow-positive properties with a good chance for capital growth, you are ahead of the game. Keep running with that.
- Pillar Property has been advising clients to buy property in Brisbane for nearly a year now and we are seeing this market rise as property investors in Sydney and Melbourne are priced out of those markets.
- If you have sizable deposit saved and a good income coming in you should not be overly concerned by the changes as you will still be able to service your loan;
We may see the inner city apartment market tremble (off the plan, new properties)
For instance, say an investor is sold a $500,000 unit ‘off the plan’ and has a $50,000 deposit, when the banks are happy to lend 90% of the value. They may be thinking that, by the time settlement is due within maybe three years, that unit could be worth maybe 10% more, so their equity will have gone from $50,000 to $100,000. Happy days.
Fast forward three years to settlement time. The banks are no longer prepared to lend 90% but our investor’s bank will still lend to 80% of the valuation. That valuation has come in a few months before settlement and the bank now has a piece of paper that says the home unit is worth $450,000. Values have fallen because there is a very large volume of similar stock on the market at the same time, in roughly the same location, and there are more sellers than buyers.
So as far as our investor’s bank is concerned, they will now lend 80% of $450,000, which is $360,000. The investor now needs to fund the remaining balance of the contract price of $450,000 ($500,000 less his deposit). So our investor needs to find another $90,000 to make the settlement. They could walk away and lose their deposit, or they could try argue their way out of the contract, but both aren’t exactly appealing options.
Plan your next investment carefully as the outcome may influence the bank’s decision on whether to lend to you in the future.
For advice on what type of investment property may suit you please call us on 1300 781 824 for an obligation-free discussion.