Like it or not, it’s harder to build a property portfolio you can retire on these days. So how do you navigate the tighter investor lending landscape?
It’s a frustrating environment. We currently have very low mortgage interest rates yet it’s difficult to access them to finance an investment property.
Thanks to APRA’s intervention, lenders have now severely tightened their lending criteria, which is threatening to cripple many investors.
How the investor lending landscape changed for the worse
Up until March this year, APRA’s guideline of capping the overall growth for investor lending by 10% per year was fairly broad according to Tim Boyle, Managing Director of Finalytics Financial.
“This was a broad guideline and if a bank exceeded this limit there was a rap across the knuckles and that was about it,” he says.
However, the continuing strength in the Sydney and Melbourne’s property markets have prompted APRA to become more assertive amid concern of the general risk building in the housing lending market.
“They became more prescriptive and announced more specific rules. They’ve also highlighted closer scrutiny of these,” explains Boyle.
The two main investor lending changes you need to know
- APRA insists the banks stay “comfortably below” the 10% growth target overall.
- Banks to limit interest-only loans to 30% of total new lending.
“The latter was a surprise and drew a lot of attention as many of the major lenders were above 40% of new loans being interest-only. APRA did not specify how a bank should do this and left that to them to implement,” says Boyle.
How the banks responded to the APRA crackdown
1. Through policy and/or assessment changes.
Some lenders changed their assessment criteria by raising the hurdles for new applicants to qualify for some loans.
This includes raising their serviceability rate calculations.
Others implemented specified lending policy changes such as no interest only loans for owner occupiers or for mortgages with over a loan to value ratio of 80%.
2. Price or interest rate changes.
All banks raised their mortgage rates to investors with additional price increases for interest-only repayments.
“For investors, this has resulted in rate increases in many cases of at least 0.75% higher than what they were paying before these changes,” explains Boyle.
It has also resulted in investors not being able to borrow the same amounts as they could before.
“Investors now face much higher loan repayments through pricing or being required to repay on a principal and interest basis,” says Boyle.
“I have seen several client investors being able to borrow 20-30% less than they could at the start of the year, effectively reducing the price they can pay for an investment property.”
The inconvenient aftermath of APRA’s intervention
- Tighter lending policies by the banks make it harder to qualify for an investment loan.
- Reduced lending levels. Before APRA intervention, the standard Loan to Value Ratio (LVR) was up to 95% of the value of the investment property. Now it’s 90% including Lenders Mortgage Insurance, which is required if you borrow over 80% LVR.
- Higher repayments. The banks now require you to pay Principal & Interest if you borrow over 80% LVR instead of being able to pay Interest Only.
- Lower demand. Non-resident or overseas customer lending has all but vanished.
- Higher interest rates. Banks are charging a higher interest rate for investment lending compared to owner occupier mortgage.
Beware of APRA’s new powers
To further strengthen APRA’s oversight, the government has now given the regulator more powers to curb risky lending practices according to Marion Mays, CEO of Thalia Stanley Group.
- APRA now has the authority to limit bank lending on a regional basis and even postcode level, if need be.
- To minimise market risk, APRA may limit lending in certain postcodes/regions such as any area where lenders may have excessive lending.
- APRA now has the ability to influence and regulate the type of security the banks take.
- For example, APRA can now limit banks to take very large scale developments or very small size properties such as 40sqm or smaller as security.
- APRA also now limits buying through 2-part contracts such as split loans.
How should you approach this new investor lending climate
The harsh truth is, lending has changed for the worse for property investors. You can no longer borrow as much and as easily as before.
But it doesn’t mean you can’t continue investing or start your investment portfolio.
The key is understanding the new lending landscape and how it affects you.
Be conservative but not afraid.
“The major change to lending has been to investor’s borrowing power,” says Redom Syed, Director of Confidence Finance. “More specifically, in the borrowing capacities are now more closely tied to their income.”
“To date, we have noticed that investors have responded to these changes with a greater sense of fear. This usually translates in investors flocking to the ‘safety’ of yield. In my opinion, this doesn’t necessarily make too much sense.”
Syed points out that despite the crackdown by APRA, interest rates remain low and credit is still readily available for investors who demonstrate serviceability.
“Simply, credit is readily and easily available to those that can afford it” -Romed Syed, Confidence Finance
Focus on quality assets.
With borrowing capacities severely constrained, the leveraging power of a ‘high LVR-high yield’ property investing strategy is far weaker than it once was according to Syed.
“For example, for a median income household earning around $150k per annum, increasing your rental yield from 4% to 5% will allow you to build a portfolio size around $120k larger with most lender calculators. Whereas three years ago, the same additional rental yield would have allowed you to more than 4-6 times the same impact,” explains Syed.
Extrapolating, it makes more sense for you to focus on quality assets to achieve your longer-term goals.
“If you’re still in the accumulation phase of investing, focusing on yield is less likely to achieve wealth creation goals that usually require increasing equity over time,” he says.
Tweak your strategy to reflect the new reality.
If you’re an experienced property investor, it may be time to switch gears from further acquisition to consolidating your portfolio.
This means lowering interest costs by switching to P&I repayments, potentially fixing rates to ride out uncertainties, and building buffers and resilience to the portfolio.
What would make a big difference to your loan application now?
1. Boost your income.
The new lending climate places a huge emphasis on income. The more you have it, the greater your chance of getting your loan approved.
Get an extra job or another source of income where possible.
2. Protect your borrowing power like your life depends on it.
But what if you don’t have a means of generating additional income?
Then you should focus on protecting your limited borrowing power as much as possible advises Syed.
“Lenders still want to lend, so it’s about being able to meet their servicing requirements,” he says.
Being aware of what impacts your borrowing power and how this change is more important than ever.
“A $10,000 credit card limit reduces your borrowing power by around $40,000 a year, or having a small HELP debt repayment could reduce average income earners borrowing capacity by over $60,000. So knowing how lenders calculate your borrowing power allows you to make relatively small adjustments to better access credit,” explains Syed.
3. Be prepared for more verification and questions from finance professionals.
Syed adds that lenders are doing more thorough reviews of living expenses, existing mortgages, rental expenses, and so on these days.
What this means is that you need to prepare a lot more paperwork and allow more time to obtain credit approval.
“Property investing takes time and requires investors to switch gears and react to different situations. Maintaining the portfolio is just as important as growing it” Romed Syed
Knowledge is power. Now more than ever.
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