Expert Advice with Philippe Brach 30/07/2016
An important aspect of investing in property is risk management and the current volatility in the lending markets is detracting investors from buying off the plan apartments.
Off the plan apartments can be financially rewarding deals to be involved in. But they also come with a degree of uncertainty – for example you can’t apply for a loan until close to settlement - and with the way mortgage markets are moving at the moment, I’d suggest the uncertainty is growing rapidly.
There’s the much-discussed risk of oversupply; this one makes for sexy headlines, but for most investors, this isn’t the worst risk in the world to worry about.
In the short-term, an oversupply may mean you have to wait an extra few weeks to source a tenant, or perhaps reduce your asking rent by $20 a week. But in the long term, supply and demand will generally ebb and flow over time, always working towards rebalance.
The bigger risk in the current lending environment, in my view at least, is the finance risk.
Changing policies impact stability
Banks and lenders are changing their loan policies on almost a daily basis at the moment, which is creating a very confusing market place for investment property buyers and refinancers.
Some lenders are pulling out of the investment market; others are increasing their exposure to investment loans. Certain lenders have made the process really difficult for investors and some are more investor-friendly.
Even for those of us who are working in the industry and are talking to different lenders every day, it’s impossible to know how the banks are going to react or what they are going to do next. In truth, even banks are still finding their feet in this new environment created to ensure that banks can comfortably withstand a major economic downturn. One thing is for sure: the good old days when banks changed their policies in a consistent and predictable manner have certainly gone!
The risk of not settling your property purchase
In the past, obtaining finance for an off the plan deal had some risks involved. But broadly speaking, if you were approved for finance at the time of putting down your deposit, then you knew there was a pretty big chance you would be approved when the property finally settled.
Now, that level of comfort has certainly gone. By tightening borrowing capacities, excluding post codes, reducing type of securities (eg high-rise apartments) or even rejecting some type of borrowers (eg foreign buyers), lenders are making it less predictable and although there is still some room to navigate the lending landscape, it certainly does not help borrowers’ confidence.
That’s why I suspect off the plan sales all around Australia are going to be affected in the months and years ahead, as these turbulent mortgage policies will continue to have an impact.
If you can’t trust that lenders will still have substantially the same policies in place by the time you settle, then who will take the risk of buying off the plan?
When buying an off the plan property, the best risk mitigation is to ensure that your borrowing capacity is very comfortable so that if credit assessment policies tighten, you are still in a position to settle easily. Also, a cash or equity buffer is a must have just in case lending ratios reduce or valuations are not up to the purchase price of the property.
Consulting a good mortgage broker would also be a smart move as brokers are typically accredited with dozens of lenders and can navigate this ever changing lending landscape.
Philippe Brach is CEO of Multifocus Properties and Finance
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property
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