The intervention by APRA has certainly made it more difficult to access finance nowadays, especially if you’re just starting out as an investor.
The banks have collectively imposed tighter lending criteria, with most lenders now requiring a 20% deposit when buying an investment property, while others have increased interest rates on investment loans.
Some have adopted drastic measures such as pulling out of the market altogether, as in the case of AMP, or not allowing investors to access the equity they have built in their properties, says Michael Daniels, state manager at Smartline Personal Mortgage Advisers.
“One lender recently announced that they won’t allow customers to access the equity they have in an investment property. That’s a big hit for people looking to use that equity to buy more properties. They won’t allow you to borrow against that property, to take cash out and buy another property. They also won’t allow you to cross collateralise – that is, use that property as security to buy another one. That
is a major issue for customers of that lender looking to build a multiproperty portfolio,” explains Daniels.
He predicts that more lenders are going to start using this tactic.
“It’s likely that some lenders are looking for some of their customers who have an investment loan to leave them because their portfolio is too big. They just can’t take on the business,” Daniels says.
Despite this challenging new world of borrowing, Garry Harvey, mortgage broker and former Your Investment Property Investor of the Year awardee, believes that investors could still continue to access ﬁnance if they have a solid lender strategy in place.
This involves knowing which lender to use and when to use them.
“You should know which lender to start with, which lender to go to next, and so on. If you get the order wrong, it dramatically impacts your borrowing capacity,” says Harvey. “This is becoming most important now because of the way the lenders assess new and existing loans, be it their own loan or other institutions’. You need to put together a lender strategy.”
What a smart lender strategy looks like
In order to maximise your borrowing capacity, Harvey suggests considering the following sequence:
1. Start with CBA
“One of my preferred lenders is the Commonwealth Bank of Australia,” says Harvey. “That’s because I believe they have a great suite of products in the market on so many levels. The bank still has quite an appetite for investment loans, still lending up to 95%, including lenders mortgage insurance. Their credit policy and the way they assess deals and the applicants are quite investor-friendly compared to other lenders, and their online platform is good and they have ﬂexibility within their products, so I will always look to start with them.”
CBA uses a 7.25% minimum assessment rate, which seems to be the rate many lenders are now adopting, Harvey says.
2. Once you’ve maxed out
Once you’ve reached the point of running out of borrowing capacity with CBA, Harvey suggests going to NAB for the subsequent loan.
“NAB is a bit more generous with their assessment of the debts that are left with other institutions,” says Harvey. “The debts that are left with CBA won’t be assessed as harshly as the new money being sought from NAB. If we started with NAB, they would assess all the money, old or new borrowing, at a much higher rate. Starting with them would give us less borrowing capacity than going there second.”
NAB charges 7.4% interest on any new money but assess existing loans with other lenders at the actual repayment with a buffer on top of that, Harvey says. What this means is the buffer added to the existing repayment on a debt with another lender is a more lenient assessment than using 7.4%. So if you had four investment loans with NAB, all four would be assessed at 7.4% principal and interest (P&I) repayments, whereas if you had three with CBA, for example, and the rate was 4.3% for interest-only (IO), the outcome of the assessment on those three loans would be much lower than if they were assessed at 7.4%.
“That’s why starting with NAB first would mean you’ll run out of borrowing capacity much quicker than if you start with CBA and add NAB later on,” Harvey says.
3. Go non-bank with Firstmac or Homeloans Ltd
Once you’ve exhausted your borrowing limit with the CBA/NAB combination, Harvey suggests going to a non-bank lender like Firstmac or looking at some of the products offered by Homeloans.
“We can even go further with them because they will still consider assessing the loans with other lenders at the actual repayment with no buffer, and only assess the new debt at their sensitised rate, which could be as low as 7%, depending on which funder they use,” says Harvey. “Starting here is likely to result in an overall lower borrowing limit because any existing loans with some of these funders get assessed at the higher assessment rate and not the actual rate, which will mean hitting your borrowing capacity sooner.”
What about the other lenders?
Harvey thinks Westpac has become quite conservative in the investment space. “They’ve removed the negative gearing add-back so investors can no longer add potential tax credits, which could adversely impact your borrowing capacity. They’ve also increased their buffer significantly so the amount of money you can borrow from them has declined a lot over the past few months,” he says.
Somewhere in between conservative and relatively flexible, ANZ assesses all loans at P&I, even if you have an IO loan, Harvey says.
“They’ve set their assessment rate at a minimum of 7.25% regardless of what you’re paying,” says Harvey. “They’ve always been a bit tougher on serviceability, so it can be difficult to get some loans to service, especially when you have multiple loans with them.”
It is important to point out that this information is accurate as at time of printing and in recent months many lenders have been updating and changing their policies in response to APRA’s directive.
Top tips for dealing with tighter lending
If you’ve been staying on top of your cash flow and relatively prudent with your investments, the new normal of lending shouldn’t have a drastic impact on you. However, it’s still important to keep on top of your cash flow, especially if you have multiple properties. Here are some tips from the experts:
• Work out whether you’re better off making P&I or IO payments
Daniels points out that while most lenders have or are increasing rates on investment loans, some lenders are differentiating themselves by how you pay your interest.
“If it’s P&I, you’ll get a cheap rate regardless of whether it is investment or owner-occupier. But if it’s IO you will pay more, regardless of the loan type,” he says.
“There can be significant differences between P&I and IO payments in terms of the cash flow impact. Sometimes you’ll find it’s better to pay a higher interest rate on IO than a lower interest rate on P&I in terms of the cash flow. Others might decide that IO is a better option cash flow wise, even at a higher rate. If you don’t plan on paying back your principal, paying the higher rate can be better for your cash flow at IO. This decision must be subject to advice from an authorised credit representative as the long-term cost of this decision can be substantial,” says Daniels.
• Find out how your lender assesses rental income
The proportion of your rental income that the lender factors into your loan application could potentially set you back.
“They may reduce the weekly rental income by 20–40%. However, now some lenders won’t include the rent at all or drop it to 50–60%, while there are still some lenders who will take 100% of the rental income into account. The range has now gone from 0–100%. Someone who wants to buy multiple properties will obviously want to have as much rent as possible included in the income calculations,” says Daniels.
• The more you save, the better
Accept the new reality that you need to save a bit longer and change the scope of what you’re looking for, advises Jeremy Fisher of 1st Street Home Loans. “This may mean you have to look further out from where you’re looking to buy just to get into the market,” he says.
• Review the rental income on your properties
Consider increasing the rent to cover, or contribute towards, any shortfall when rates rise.
Biggest mistakes you could be making now with your mortgage
As finance is becoming harder to get, you need to make sure you avoid the following traps when borrowing in the current market:
• Choosing the wrong lender or sticking with the same lender you’ve always had
Every lender is different and there are very detailed, nitty-gritty policy changes that you just won’t be aware of, says Daniels.
“The banks are dramatically different – more so than ever. The lender you trusted for years might have policies and criteria in place that completely undermine your multiple property portfolio plans. Being loyal is no longer relevant. Your mortgage broker would know what every lender can and can’t do,” he says.
Therefore, it’s important to choose the lender above the best rates as this could mean either being able to continue investing or hitting a brick wall sooner.
• Be cautious about fixing your rate
Because of the fast-moving nature of the lending policy changes, you don’t want to be stuck with your lender long-term by being tied to them by a fixed loan, says Daniels.
“If your lender’s criteria are no longer working for you and your investment plans, you want the ability to be able to move to another lender that does, so you want to have a variable rate, not a fixed rate,” he says.
The bottom line is the investment loan market is still very competitive. It’s always best to do your research or speak to a broker when thinking about applying for a loan.