When looking ahead at what 2019 will bring, many in the industry believe that it will continue to be a turbulent year for property investors.
With the royal commission releasing its final report in the first quarter of 2019, which will no doubt have lasting implications for lenders, brokers and borrowers alike, many are forecasting that investors will be increasingly looking outside the big four for finance.
“We’re seeing an increasing number of borrowers being frustrated by cumbersome, slow and unclear approval processes and policies by major banks,” says Liberty’s head of consumer advocacy, Heidi Armstrong.
“That means there are a lot more borrowers who are on the cusp of qualifying for a traditional loan but who find themselves needing a custom lending solution. There could be all sorts of reasons for this, including a small, non-financial blemish on their credit history, criteria such as employment length, or even spending habits seen in bank statements.”
As a result, non-bank lenders have “increased in relevance in recent years”, Armstrong says, because they offer “helpful solutions right across the lending spectrum”.
The need for investors to be savvy in their research while remaining open to all options on the table is a trend that is expected to continue, as the one thing everyone agrees on is the fact that the current situation is ‘the new normal’.
“The major lenders are unlikely to soften their policies and may even become more restrictive as a result of the royal commission’s recommendations,” says D’Vaz. “In the meantime, more and more interest-only loans are set to expire, leaving many investors keen to refinance their loans, which will continue to be difficult.”
Meanwhile, the upcoming general election, which will see taxation of investment properties in the spotlight (with Labor proposing changes to negative gearing as a key election promise), is doing nothing to quash investors’ anxieties. In fact, if anything, it’s creating even more uncertainty for those looking to add to their portfolios in the next 12 months, says Adelaide Bank’s head of broker distribution, Amanda James.
“Regarding the impacts of the upcoming federal election, it will take some time for proposed tax and other policy changes, including those as an outcome of the royal commission, to wash through the system if there is a change of government, and to accurately gauge how these changes will influence investor behaviour,” James explains.
For property investors, the most important takeaway for the coming year should be that valid options are still out there, D’Vaz adds.
“Keep looking for a lender who is willing to help if you can’t find a solution with your existing bank. The coming year may bring continued upheaval to the sector, but with the right strategy and the right support there is potential for great opportunity among the chaos,” he says.
Five strategies to boost your serviceability
1. Shop around
Use a mortgage broker to help you find the best rates and most suitable loan products on the market. Keep in mind that it’s not always about getting the absolute cheapest interest rate; after all, what good is finding a loan that offers a saving of 0.2% if the bank won’t approve your application in the first place?
2. Reduce your credit card limits
Immediately! Credit cards chew through your disposable income, so reduce them to the lowest amount you possibly can. Then as you pay them off, continue reducing the limits. You don’t need to use round numbers either – you can reduce from, say, $2,500 to $1,800.
3. Eliminate personal debts
Do this however you can. Car loans, storecards, credit cards, personal loans, fast-finance debts: pay them off as a priority (if you can afford it), then cancel the cards and accounts as they’re paid. This will free up your income from the bank’s point of view. Alternatively, consolidate them into one more affordable monthly repayment and cancel all of the cards and credit facilities so you don’t rack up more debt.
4. Decrease spending
Banks want to see evidence of your financial reliability, so demonstrate that (at least for a few months before you submit your loan application) by reducing your disposable spending on restaurant meals, Ubers and cabs, clothes, gadgets and other lifestyle expenses.
Extend your loan term on an existing loan. If you’ve had your PPOR loan for five years, refinance the current balance over a fresh 30-year period. This will reduce your monthly repayments and improve your serviceability. Just be sure to keep making the same higher monthly repayment that you were previously so you don’t end up paying a massive amount of extra (avoidable) interest.
How to boost your loan serviceability
It’s now harder than it was a few years ago to gain loan approval, which is why you need to present the best possible case regarding your ability to service a new loan.
The tightening of lending began over two years ago, after APRA introduced speed bumps to slow down investor lending. This resulted in slightly increased interest rates, which slowed the number of investor applications. In addition, the banks were forced to decline a number of loans that previously would have made the cut but could no longer be serviced under their tough new criteria.
The royal commission called out the banking industry for its lax practices, such as its failure to thoroughly check living expenses. This move was also one of the reasons why it became harder for borrowers to get a loan, as lenders now require borrowers to list every single expense, discretionary or not.
Philippe Brach, founder and CEO of Multifocus Properties & Finance, confirms that it “certainly is more difficult to borrow now”, to the point where borrowers with even the most sound applications are struggling to gain approval.
“I modelled the borrowing capacity for some of our existing investor clients, comparing their position three years ago and using the same numbers today in current lender servicing calculators,” he says.
“The result was that serviceability was reduced by between 30% and 50% compared to three years ago.”
According to Brach, banks have become so paranoid about making mistakes that they have become almost paralysed by this.
“I find it silly [that applicants need] to include restaurant bills, hobbies, holidays and charity donations, when borrowers can reduce these expenses when they feel some financial pinch,” he says.
“Most people will spend more on discretionary items in line with their increase in income, so the net result is a lower borrowing capacity for everyone. Considering that loan default rates in Australia are amongst the lowest of all OECD countries, it seems that the tightening is somewhat overdone.”
Today, no matter which lender you are approaching and what criteria they use when assessing your application, there are things you can do to boost your chances of getting that all-important approval.
To get financing in the current environment, Brach says investors who are serious about adding to their property portfolio in 2019 need to seriously consider their spending habits for the year ahead. This is not the time to upgrade your car to the latest model or to book a four-week holiday throughout Europe; instead, you should aim to demonstrate to the banks that you can strongly control your expenses by spending less.
“It is a silly situation: if you want a loan, you may need to go on a serious diet and be miserable by cutting down on entertainment, recreation and restaurants,” he says. “The good news is that, once you have your loan approved, you can go on a binge again!”