The Reserve Bank has admitted it is considering placing a lending limit on the amount that Australians can borrow. It appears from the minutes of the recent Reserve Bank board meeting that there is some concern over the rising home prices being seen across Australia and the resultant increase in home lending.
It seems there has been some discussion of a need to implement a form of “macro prudential policies” which could include a limit on the LVR (Loan to Value Ratio) allowed per borrower, limiting lending by income or perhaps both.
From an investor’s point of view, rising property prices are a just reward for holding property over a period of time while providing affordable housing to the rental market. Tapping into this equity is essential to be able to grow your portfolio which, after all, is about investing, not providing charity. While the proposals are simply discussion points, at present it does reveal the level of concern the Reserve Bank has for rising prices in the property market.
Let’s look at the effects these policies could have on borrowing for an investor.
A limit placed on LVRs to say 80% would not pose a big issue to an established investor. I don’t usually recommend borrowing past 80% on a single property anyway and for most people the remaining 20% is usually found within the portfolio.
If a higher LVR is required there may well be difficulties. It is hard to imagine a total embargo on high LVR loans as there will always be a need for this type of borrowing such as First Home buyers.
Who knows if a first time investor will have access to them?
The trend of younger people buying into the market via an investment property as their first purchase may well be affected. These purchasers are usually looking to build capital growth over time by using the market increases to leapfrog themselves into their own home while still renting in the areas they want to live in.
Would this mean ‘Back to Square One” perhaps?
The second option raised by the Reserve Bank was to limit the borrowing capacity of Australians based on their income. Basically they would achieve this by having the Lenders increase the assessment rates currently being used to “test” a borrower’s capacity against future interest rate increases. Rather than the common 2% above the standard interest rate, it’s proposed to make it 4% or perhaps even more. Again, the intention is to limit the amount of borrowing an individual can get.
Potentially, this could have the most serious impact on an investor I believe. The ability to access funds is paramount as they are used primarily to provide a buffer to cover expenses and unforeseen circumstances, as well as the ability to purchase further properties. Reducing this capacity could create issues for those investors with little or no reserves and being able to address this by accessing additional funds may be artificially limited. Now this is not to say you can’t borrow at all, just that the amount could be limited by harsher rules and when I say limited, let’s be clear, I mean reduced.
I have always maintained that you should borrow more than you need, whenever you can. The bigger reserve you can accumulate means you can hold on to a property during times without rent, without employment or whatever else life throws at you. In the past we have always used times of low interest rates to borrow for the future.
Low rates has meant low assessment rates which usually translates into more borrowing and more borrowing means more property or at the very least, more reserves.
I think now is a good time to review your ability to borrow. While the Reserve Bank is only discussing these issues now, preparing for all circumstances is the hallmark of a serious investor.
If you would like to have a chat about how these discussions may affect your portfolio, please feel free to contact me at firstname.lastname@example.org.