Media outlets are increasingly busy trying to keep up with the radically evolving lending landscape we currently find ourselves smack bang in the middle of.
Recent survey results suggest that many investors are rethinking plans around their property portfolios, as lenders introduce a raft of changes in relation to investment lending specifically.
Trilogy Funding’s financial strategist, Lucy Blain says, “We’re getting updates on an hourly basis from different news sources that the lending landscape is evolving. It’s a speculators dream.
“The Reserve Bank of Australia is sitting tight on the cash rate. Speculation is that they will have to move it up to slow the housing market and in turn, inflation will follow suit.”
Not so dreamy for investors
As the banks independently raise their retail rates and adjust their respective lending appetites, in line with the introduction of tougher regulatory constraints, the current playing field is proving challenging for serious, long term property investors looking to actively build their asset base, and consolidate a stable future fund.
Interestingly, unlike APRA’s intervention two years ago, this most recent clampdown, alongside the government’s introduction of a bank levy, seems to have had the desired effect in starting to subdue investor activity across certain key housing markets.
Mortgage Choice’s annual investor survey revealed that 42.6% of investors said the new lending restrictions impacted on their property investment plans, which is up from 33% for the previous year.
Specific changes causing investors most concern are with regard to the restriction of Interest Only loans to just 30% of all new residential mortgages, with conjecture that IO loans may soon become a distant memory, as no-doc and low-doc loans did post GFC.
The Mortgage Choice findings suggest that 51.5% of respondents believe these restrictions will slow down investor activity over the next one to two years.
“With banks independently raising rates and adjusting their appetite on lending based on keeping within the constraints placed on them by the governing body, APRA, does the RBA need to step in at this point?” asks Lucy.
Word on the street
Experts who have been in the financial services sector for years are scratching their heads at the complexity and confusion surrounding the industry right now.
“Regulatory requirements on banks to mitigate risks with increasing property prices is what’s leading the change,” says Lucy of the chaotic vicissitudes we’re seeing.
“While word on the street from real estate agents is that the top end of the Sydney market is starting to soften.”
She does question however, whether this is a direct reflection of bank policy changes exerting their desired influence, or simply a case of the traditional, real estate winter blues that hit every season and slow things somewhat…
Lucy reports that the four majors; Commonwealth, Westpac, ANZ and NAB, are no longer offering investment interest only mortgages over 80% on the value of the property.
“Owner occupied loans are still being offer at 90%, with a handful of banks and lenders pushing up to 95%,” she says. “But interest only at these levels is a thing of the past.
“With banks now railroading borrowers into principal and interest loans, it’s only natural that the risk of highly leveraged properties will, albeit slowly, start to reduce as borrowers pay off the principal of their property. Thus reducing the banks’ exposure if there’s a market correction, as they’ll hold more capital against their mortgage portfolios.”
The banks seem to be a little more nervous now, than they did when APRA previously got all gruff with them, working to actively reduce their risk exposure and apparently taking regulators a lot more seriously.
What else is changing in this landscape?
According to Lucy’s observations from the coalface, the banks are now using a much higher assessment rate to evaluate borrowers’ capacity.
“The majority of lenders are now assessing the borrowing capacity of loans at 7.25% principal and interest repayments on both current and new mortgages,” she says.
“While you might still be paying between 3.6% to 5% in interest only repayments, the bank will still use 7.25% to assess if you have capacity to repay the debt. Banks are also looking for borrowers to have a higher ‘net position’ once they have entered in all liabilities.
“Whereas some weeks ago, banks were happy to see a net position after deducting all debts and living expenses (at assessment rate) of below $100 per month, they’ll now go through these applications with much more caution,” says Lucy.
She reports that in some cases, for approval of in principal purchases, lenders will pull down the purchase price so that the net position is more comfortable based on current servicing requirements.
Lucy says banks are facing the prospect of decreased profit margins, with borrowers moving to P & I mortgages, and recently all four of the big boys have increased their interest only rates by up to 0.30%.
Advice for investors
“Fixed rates on interest only loans are yet to follow these fast increases, so some deals are still to be had,” says Lucy.
“There has never been a better time to make sure your property portfolio is structured correctly for future investment and to minimise risk.
“If you have equity in a property, my advice would be to release it to the maximum the bank will currently allow, as current evidence suggests that loan to value ratio options are changing, and you need to put yourself in the box seat. The property market will always ebb and flow, but with structure and strategy, you can be in control of your financial future, not the banks.”
If you would like to know more about where the lending market is heading, straight from the coalface, connect with Lucy via her Mobile: 0488 448 467. Because now is really not the time to be navigating the world of credit alone!
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).