Expert Advice with Todd Hunter. 9/11/2017
Getting a loan today, certainly isn’t the same as it was 12 months ago…
I thought it was time we wrote something to explain what’s changed in the mortgage world, why and how you can beat the changes, by making a few adjustments yourself.
The Australian Prudential Regulation Authority (APRA) began their hold on investment loans back in 2014 when they requested the maximum LVR on investment loans be reduced to 90% inclusive of lenders mortgage insurance. This had a slight impact into the investment property market, but only to new investors.. Anyone with equity meant they simply had to use more equity to get into the market.
Then, in March 2017 APRA announced new measures around residential mortgage lending to put a hold on the huge growth in investment lending.
Coupled with that, the same year in December 2017, the Federal Government announced a Royal Commission into the banking industry.
That’s two big Government bombs dropped in the one year wouldn’t you say?
So, by June 2017, the investment loan changes had come into effect by the banks, but, they were still open for business, they just increased the rates for investment lending to spread the risk, and began changing those loans that were secured by Owner Occupied properties back to Owner occupied loans.. easy, not a massive hurdle to get over.. Short term gain for those investors, and hey, at 5%, rates were so low, a 0.40% increase didn’t matter?
But, APRA didn’t stop there. More changes were to come.
APRA’s goal at the end of the day was to reduce investment lending across the board and reduce the number of interest only loans.
Why? Well interest only loans are just that, no principal is being repaid on the loan. Investors use this type of loan as they are relying on a capital gain to increase wealth. But what happens if the property doesn’t increase in value or worse still it decreases in value? Investors could be left with negative equity in the supposed wealth creation vehicle.
So all this growth in lending and fewer borrowers actually repaying the debts.. Well that can only be trouble down the track.
2017 saw a pull back of investment lending, but there were still buyers out there, as the finance was still available.
At the start of 2018 we have seen a number of changes already, including;
- Servicing from banks changed. Where you could (with some lenders) borrow eg a $300,000 loan, and pay interest only, the banks would assess your capacity to repay that $300,000 based on the interest only loan repayment, not the principal repayment? Seems crazy, but yeah, that’s how many banks were assessing your capacity to repay the loans.
- Living expenses for you was assessed based on a general guide, i.e. what would a family of 4 spend if they lived in Earlwood Sydney… But now, well you need to provide bank statements, a budget of what you spend and if you are wrong by your calculations, watch the banks cut through your application with a fine toothcomb.
- Investment finance for Expats has all but dried up as the lending parameters made it simply unachievable for majority of borrowers..
- Foreign Investment lending has stopped all together; the banks have just said thanks but no thanks.
- The biggest lender in the SMSF arena very quickly withdrew from this space and no longer accept SMSF loans
- Loan repayments are now assessed at a minimum interest rate of 7.25% over a 25 year loan term. Is that a huge difference you ask, well lets look at an example you can work with;
You borrow $600,000 for an investment property in 2015. 30 Year loan with 5 years interest only – your interest repayment is $2500 per month based on a 5% interest rate. So, many of the banks would use this $2500 as the minimum loan repayment to service the debt.
- Now, that same $600,000 loan you borrow is assessed at 7.25% over a 25 year P & I term, that equates to $4336 as a minimum loan repayment used to service your loan..
- That’s a difference of $1836 taken from your surplus cash flow to service the loan you are applying for.
- Add a few properties into the mix.. And you can understand how the change in borrowing capacity has had an effect on the property market.
Then, lets add the Banking Royal Commission outcomes into the mix…
The banks have been smashed with examples of Rogue bankers and mortgage brokers providing finance to customers who could never afford to repay the loans.. Lets remember though, those same borrowers were happy to take the money in the first instance, but, still, the person providing the service as a duty of care to provide advice, and it seems over the years, there has been a minority making a mockery of the banking system.. What changes that we see from the Royal Commission final report is due February 2019. And with a Federal Election in 2019, no doubt any recommendations provided, the banks will follow closely to win as many votes as possible…
What has become obvious though is that in many cases, it has been profit before duty of care. So, the changes to our banking rules now while painful as a borrower, much of the changes are common sense that should have been applied years ago.
Now today, what does it look like?
So, what’s new for you?
- You are now assessed on a higher interest rate and loan repayment – this will impact both home and investment loans.
- Interest only loans are still available – but more so for investors then owner occupied loans- seriously though, why would you not want to repay your home loan? If you are borrowing for investment but the security is your home, that is not the same.. . It’s the purpose of the debt not the security.
- Your living expenses – be prepared to provide info on gym memberships, zip pay, Netflix subscriptions, Uber Eats etc., it’s not just what “loans” you have, it’s what you spend your money on.
- If you have credit card limits you don’t use, you’ll be penalized as 3% of the limit is used to service the loan. Irrespective of the what you owe.. so now may be the time to reduce the limits.
- If your interest only term has expired, don’t expect to be able to easily extend the interest only term.. The banks are not interested, and rightly so, they don’t know if you can afford the P & I repayment down the track? So, you will need to either; a) repay P & I repayments b) apply to the bank for a increased loan term, i.e. another extension c) refinance elsewhere if your bank will not refinance your loan d) if all else fails, the last alternative is to sell your property as you are unable to afford the loan repayments.
- Be prepared to provide more information to apply for finance.. banks want to see your wages being deposited into your bank account to confirm your pay slips match the deposits, plus what exactly you are spending your cash on.
- Coupled with this, we’re now assessed based on credit score, not just weather your credit file is clean and free of issues… here is a good piece of reading to explain further how this helps those that pay their bills on time every time.
All of these changes in lending are many of the reasons for the slow down in particular in the Sydney and Melbourne property markets, changes in lending and the Chinese buyers fleeing the market, you now have a clear understanding of the perfect storm that has been created.
In summary though, finance is still possible..
But it’s just now a little more conservative…that’s not all bad for those that have borrowed within their means.
If you cannot afford to pay a Principal and Interest loan repayment on any loan you apply for, then chances are you shouldn’t have borrowed the money in the first place.
It isn’t your money, it’s the banks, you just borrowed it.. Now Big Brother wants to know you can pay it back…
Todd Hunter is director, buyer’s agent and location researcher for Sydney-based wHeregroup. He is an active property investor himself and amassed a portfolio of 50 properties by the age of 31. For more of Todd's musings, see his Expert Advice section on our website OR visit the wHeregroup blog.
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.