As the Australian Prudential Regulation Authority’s (APRA) clampdown on investor lending continues, experts believe one segment of the property market is likely to be hit harder than the rest.
Over the recent months, APRA has introduced new requirements for how much capital banks must hold against their mortgage books and has also repeatedly urged the banks to keep year-on-year growth of lending to investors to below 10%.
This push by APRA has resulted in major and non-major lenders introducing a number of new measures around their loan requirements, including higher interest rates, stricter servicing requirements and higher loan to valuation ratios.
One lender, AMP, has even gone so far as to pull out of the investment lending market all-together for an as yet undisclosed period.
These steps by lenders have people such as Todd Hunter, founder of mortgage brokers and buyer’s agency wHeregroup, concerned for people who have entered into agreements to buy off the plan properties.
As a buyers' agent, Hunter said he would never go near an off the plan purchase, however he can understand why in some circumstances people would be drawn to them.
“Look, unless you’re buying a holiday house or somewhere that’s going to be your home and you know you can comfortably service the debt, then I don't usually recommend buying off the plan,” Hunter said.
“But right now, especially in Sydney and Melbourne, I definitely wouldn’t be going near anything off the plan, I think we’re going to see a glut of people in the near future for who it will come time to settle and they’re going to get caught out.”
Hunter’s wHeregroup is based in the Sutherland Shire and he points to large unit developments in that area as an example of what he is concerned about.
“If you buy an apartment off the plan in Sydney you could be looking at a year or more before it’s time to settle,” he said.
“Right now there’s the huge Sharkies’ development happening in Cronulla and another big one at Kirrawee and those people could be waiting two years for their apartments, some of which were going for $1 million, to be finished.
“With what the banks are doing with changing LVRs from around 90% to 80% somebody who put down a 10% deposit on a $1 million dollar unit is going to have to come up with another $100,000 when it comes to settlement time.”
While most people who have bought property recently will be pleased by constant talk of price growth, Hunter believes off the plan buyers have cause for concern.
“With the way Sydney’s prices have been going there’s definitely going to be a cooling off over the next year or two and if that happens when it’s time to settle there will be trouble.
“If that happens and the bank values the property at less than the price you agreed to buy it for then they’ll only finance that lower amount and you’ll be hit with making up the shortfall.”
Even if your valuation comes in at the right price, Hunter said a loan still isn’t guaranteed.
“In 13 years of mortgage broking I’ve never seen anything like this with what the banks are doing with servicing, it’s got to the point where we have to have a whiteboard in the office where we update each day how banks are changing their servicing requirements.
“The changes are quite significant as well, minimum repayments are going up and they’re changing things like the amount of rental income they’ll consider, last week ING went from considering 80% of rent to 70% over night.”
Hunter isn’t the only one concerned for off the plan buyers, with Michael Daniels, NSW director from mortgage brokers Smartline saying he would be “pretty worried” if he was currently under an off the plan contract.
“Look, these things at the moment aren’t permanent and when it comes time for you to settle everything might be fine, but if I was settling an off the plan property in the next little while I’d be pretty worried,” Daniels said.
“I’d be having a look at my contract but they’re usually pretty well set in stone so you probably wouldn’t have much luck there.
“If you have no luck with that, the only other thing I would suggest would be to buy it as an owner occupier, not investor that will give you a better interest rate and better LVR, so if you can do that I would.”
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