To understand how the new loan restrictions affect investors we need to take a look at what the Banks have done in response to the Government regulator APRA (Australian Prudential Regulatory Authority) limiting borrowing by Banks.
Much has been written about the interference in the property markets by targeting lenders and placing limits on their lending books. These restrictions have flowed through to new and existing property investors to the point where checking your ability to borrow is an absolute must prior to any purchase. Locking down borrowing capacity in the light of these new loan restrictions has become the first step for many Australian property investors.
Unfortunately, money has become the casualty in the battle to slow down the property markets of Sydney and Melbourne. We can argue long and hard about whether it’s the correct stance by a government regulator to interfere in the first place but that is beside the point. Accessing money is at the heart of the matter.
We have no doubt the Lenders are willing and able to lend but they are hamstrung by the imposed limits. Rather than increase borrowing to feed their appetite for profit Lenders are having to increase rates on existing borrowers, who were never targeted by APRA in the first place.
The downside then, in theory is that if all the lenders were at their imposed investor limits, you would be unable to get investment credit from them regardless of how good a credit record you have.
The tightening involves tweaks to the way income and commitments are calculated as well as acceptable LVR’s (Loan to Valuation Ratio) for different types of properties. Each of these changes is designed to limit borrowing in certain segments by lowering the amount of credit you qualify for. As an example, by changing the LVR for a certain type of product, such as investment loans, you end up with borrowers putting more money into a purchase than normal. As a result, property investors naturally become more cautious about where they will invest their money because less borrowing capacity is available.
The difference in LVR can be substantial. Previously, there were many Lenders who would do 95% LVR for investment properties. Nowadays higher LVRs are only available for Principle and Interest Investment loans and Interest Only options are limited to 80% by the major Banks. Other smaller lenders are also dialling back their capacity models.
Interest Only options are also something the Regulator wants to slow down.
The prevailing attitude is that Mortgage Loans should be Principle and Interest so that the borrower is building equity into their investment. Therefore, loans with Interest Only requirements have a margin added to the interest rate to make them more expensive.
Another interesting development is that refinancing of investment loans is also getting harder, not just from the credit conditions and servicing calculators but also from the adoption of a direct policy by certain lenders.
This is a dilemma for investors.
The discussion around Principle and Interest repayments is an interesting one as some commentators are suggesting that Investors should make P & I repayments regardless so they are reducing the debt and building equity. The only problem is that over a typical 5 year interest only period the reduction in debt is quite small. It’s unlikely to make much difference if someone is finding it difficult because of a higher interest rate environment.
The reduced access to refinancing is more of a concern than anything else.
However, the current situation could be viewed as an anomaly from a historical perspective because it has come about on the back of interference from APRA, rather than a normal market condition. So we can say that because the current interest rate spike is artificial it should also be temporary. With that in mind it was refreshing to see the RBA Governor announce that he thought the measures already put into place had gone far enough.
Common sense would dictate that the markets must return to a normal trading state at some point in the future.
As it stands, we are forced to work with the credit conditions we are faced with. The good news is that property investing is still a valid means of creating wealth and borrowing remains the preferred method of leverage.
Would you like an updated appraisal of your current situation? Why not make an appointment with one of our experienced Mortgage Brokers today.