How do you navigate the tighter lending conditions Post-APRA crackdown? These simple yet powerful tips from Australia’s leading finance experts might help.
Frustrated with the ever changing and tightening lending policies? So are most investors these days.
If you’ve tried applying for a mortgage recently, you know how painful it is to go through the process now. And there are no signs it’s going to get better anytime soon.
And if you’re lucky enough to get approved, there’s no guarantee that you get the amount you want. You’ll now have to come up with more cash upfront and you’ll be paying a higher interest rate as well.
Indeed, getting an investment loan is becoming, even more, a distressing endeavour.
The good news is, there are still ways to get around this new normal of investing.
So how should you navigate the new investment lending landscape?
To help you increase your chances of getting more finance, we tapped the expertise of Marion Mays, Wealth advocate and CEO of Thalia Stanley Group and Tim Boyle, Managing Director of Finalytics Financial, Redom Syed, Director of Confidence Finance, Steven Ryan of Interstellar Finance and John Flavell, CEO of Mortgage Choice.
A word of caution:
While the following tactics have been proven to work, not all will be suitable to your situation. You need to look closely at your own needs and make sure you speak to a professionally qualified expert before making any decision.
Property Market Insider’s Guide to Borrowing to Invest Post-APRA Crackdown
1. Repay principal and interest rather than interest only from Day 1.
The current tighter lending is certainly forcing us, investors, to be more conservative. This means reducing overall debt levels by paying principal and interest from the start.
“It’s the most obvious move you can do,” says Boyle.
“This may not be such a bad thing for many borrowers as it results in more consistent loan repayments throughout the life of the loan. It’s also generally cheaper than starting off on interest-only.”
Syed warns that it’s important to plan for this step as the potential shock to your cash flow can be massive.
“This can be as much as a 25-30% jump in repayments when this happens,” he says. “The potential for this payment shock should be factored into your debt management strategies.”
2. Apply for a Principal & Interest loan instead of Interest Only.
In the past, this is considered a dumb move as it uses up more of your cash and limits your cash flow due to the higher repayments.
With the APRA crackdown, you have few options than biting the bullet and taking a P&I investment loan.
Just beware that for some lenders, a P&I structure may improve your serviceability while for some banks it may do the opposite warns Steven Ryan of Interstellar Finance.
“It’s about understanding how lenders treat your existing mortgage and how they view your other debts from other lenders,” says Ryan.
“These policies are always changing so you may get a favourable policy this week from this lender and next week, it will be tighter and other lenders will be more open. You really need to be careful and speak to a broker before hand.”
3. Beef up your buffer and strengthen your risk strategy.
Syed warns that the post-APRA world means some investors have over-leveraged or have borrowed too much, and are in riskier positions than they may be aware of.
“For some investors, the APRA lending changes will effectively force deleveraging over time,” he says.
What this means is that you need to start paying off your mortgage to reduce your overall debt.
To maintain a strong financial position, Syed recommends planning and preparing for:
- Your lenders: If you have mortgages with the risky non-bank lenders, you should have bigger buffers in place.
- Your LVR: The higher the LVRs on your mortgages, the greater the buffer you should have.
- The number of properties you have: Diversification of rental income is useful, but more properties usually mean more maintenance costs. Make sure you plan and prepare for this.
- Insurance: Ensure you’re adequately protected for emergencies.
“One of the best management strategies is to hold appropriate buffers in place – this may include releasing equity and having access to emergency funds” Romed Syed, Confidence Finance
4. Switch existing mortgages to Interest Only.
As we’ve suggested in our article Counterintuitive strategies to consider now and Feeling squeezed by the recent lending changes?, consider changing your repayment method from interest only to paying principal and interest.
Doing so may also help you get a lower interest rate and help you boost your equity more quickly as you reduce your mortgage.
Flavell points out that your decision depends on your loan size, your loan-to-value ratio and your potential interest rate.
“Every situation is different. In the last few weeks, we have seen a number of lenders lift the rates across their suite of interest only products. As such, the rate spread between a principal and interest product and an interest only home loan could be as much as 80 basis points” – John Flavell, Mortgage Choice
5. Reduce your credit card limit immediately.
If you want to control spending and significantly boost your borrowing capacity, you need to reduce your credit card limit to your monthly living cost according to Mays.
“For example, you spend $5,000 to run your household each month, then limit your credit card to that. Then put all your expenditures on your credit card so that you’ll have the itemised record of how you’re spending. This way, you can monitor and then measure it. Most importantly, make sure you clear this debt monthly,” she says.
6. Shorten your mortgage term.
Mays also suggests refinancing your loan and structuring it with a shorter life span.
“Yes, the banks want you to take 30-years mortgage because that’s how they’re going to make the most amount of money. What we say is restructure your debt and if you can afford it, shorten your home loan term to 20 years. This means you make higher repayments. But this is also a forced savings plan. Because we’re all living beyond our means.”
7. Be realistic about what you can borrow.
You should allow some borrowing capacity up your sleeve and avoid maxing out your borrowing.
“Don’t be too ambitious about your borrowing,” says Boyle. “Watch out for your loan-to-value ratio (LVR) and the net servicing ratio (NSR). An ideal loan from a lender’s perspective is for the first one to be low and the second to be high.”
8. Review your other credit facilities.
Look at your existing debt facilities such as credit cards, personal loans or car loans and get rid of anything that you are not using.
This will help you control your spending and massively improve your serviceability.
9. Focus on paying your non-tax deductible debt first.
Boyle points out that even though interest only rates have increased significantly and the price premium for investment loan is higher than an owner-occupied loan, you should still focus first on any debt that is not tax deductible.
“As an example, if you have an owner-occupied loan paying 4% and an interest-only investment loan at 5.5% and you are at a 40% incremental tax rate, you should leave the interest-only loan as it is and pay down your owner-occupied mortgage first. After tax, your loan cost for each of these loans is 4% and 3.3% respectively.”
10. One declined application doesn’t mean others will decline it.
It’s not easy to remain positive when it’s tougher than ever to get your loan across the line.
However, it’s important to remember that the banks are selling debt as their main business. This means that more than ever if a bank refuses a loan application, it doesn’t mean it will be turned down elsewhere says.
11. Be aware of your current ‘borrowing power’ position under current borrowing power calculators.
As an investor, it’s useful to know how lenders view your current financial position according to Syed. “Lender calculators are quite similar now. If you can’t borrow any additional funds with most lender calculators, it’s quite possible you’ll be forced to deleverage over time. If you’re in this scenario, it is a good idea to work up a risk management plan that focuses on debt repayment over time.”
12. Find a really good mortgage broker.
With so many changes happening in the mortgage market, it’s not easy to keep up with all of them while trying to build your portfolio.
As such, it pays to work with a really good, property investment-focused mortgage broker.
“A professional mortgage broker not only has the ability to look at other products and lenders, but they are also abreast of what is happening in the property market and can advise investors appropriately,” says Flavell.
“A broker will also explain exactly what you need to do in order to have your application for finance approved. They will be able to sit down with you and explain the different paperwork you will need, look at your credit history and highlight whether or not it will have any bearing on your ability to obtain finance.”
Don’t go directly to a bank as you run the risk of having that lender decline your loan. This rejection will then sit on your credit score.
13. Live within your means.
“In the face of the APRA crackdown, it becomes even more important to stress that we have to be more proactive in areas that we have control over,” explains Mays.
“We don’t have control over regulation. We don’t have control over how much money the banks will lend us. We do have control over reducing our personal debt and how much money we choose to spend.This is the only influence you have as a consumer, with this regulation.”
Protect your borrowing power like your life depends on it.
For most of us investors, using other people’s money or the bank’s money will still be the key to growing successful investment portfolios.
As Syed clearly puts it:
“Property investing is a game of finance. Arm yourself with as much knowledge about borrowing capacity as possible, and seek to manage it so you can borrow to invest further.”
Knowledge is power. Now more than ever.
The rules of the game have changed. Make sure you stay ahead of the curve and learn the advanced strategies and actual borrowing systems successful investors use to get more finance despite the APRA crackdown.
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