In the wake of the Royal Commission the industry is expecting big changes to the way banks approach lending. In short, getting a loan will become harder. So how can investors continue to thrive, when lenders keep changing the goal posts?
Banks are certainly very reactive when they get exposed to scrutiny and this creates a climate of uncertainty for borrowers. Before the GFC, bank lending policies were stable and reliable and, funnily enough, they were very similar amongst major lenders. Nowadays, lenders change them almost daily and have markedly different policies from one another.
To give you an idea of the scale of changes, a typical borrower can currently borrow around half of what they could borrow back in 2014. Of course, this changes from person to person, but it is quite a striking change.
Also, when calculating a client’s borrowing capacity, the range is amazingly wide depending on which lender you go to. For a given client, it can range from a borrowing capacity of zero with one of the majors to $1million with a secondary lender, whereas in the past the same client would be able to borrow in a much narrower range of say $700K - $900K.
So, what do investors need to do to optimise their chances of investing wisely in such an environment? Here are a few ideas:
First things first…
Given the current complexity of the lending landscape, any borrower going directly to a bank for a loan must have rocks in their head. They will be sold that bank’s product and, given the widening gap between bank offerings, it may not be the loan that is in their best interest.
The smart thing to do is to go to someone who can canvas the entire lending landscape daily and come up with optimum solutions: a good mortgage broker. It is no fluke that since the GFC, mortgage brokers have increased their share of total loan origination from 45% to 57% in 2018.
The main elements squeezing an investor’s borrowing capacity are living expenses. In the past lenders used static matrices about borrowers living expenses, and they covered only “basic” items such as food and clothing. Nowadays, everything a borrower spends must be declared, including takeaways, holidays and even expenses on investment properties! A lot of expenses are discretionary or not “living expenses” but these are the new rules and it seriously affects an investor’s borrowing capacity. So, it pays to be watching these carefully as they can make the difference between getting a loan or not.
Off the Plan.
In the past it was no big deal to buy off the plan apartments. In fact it was a common strategy amongst investors. Today, I have learned to become wary of units sold off the plan, as an investor has no clarity regarding what a bank’s policy will be in the future. Banks can easily decide to blacklist a postcode, exclude some type of apartments (high rise, etc…), restrict loan to value ratios (from 90% to 70% for example) and even ban some types of borrowers (typically foreigners, and sometimes expats). Also, valuations on apartments tend to be volatile, especially in an oversupplied market.
Philippe Brach is CEO of Multifocus Properties and Finance
Philippe is an experienced property investment specialist, mortgage broker and author of ‘Creating Property Wealth in any Market’.
Contact Philippe and get a jump start on your portfolio with expert advice.
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property