As APRA charges to the ‘regulatory rescue’ in an attempt to rein in what has widely been labelled ‘runaway’ investor lending by Aussie banks, anyone who relies on credit to acquire residential real estate must acclimatise to a new financial world order.
Honing in on continued growth around investor lending data, aligned with a decline in owner-occupier based property borrowings, APRA is encouraging lenders to rebalance their mortgage books and shore up billions of dollars in additional capital reserves to protect against losses on their loan portfolios.
June figures from the Reserve Bank revealed property investor lending grew by 10.7 per cent, year-on-year across the banking system as a whole, as opposed to just 5.5 per cent for owner-occupiers.
Westpac was the only major that seemingly took APRA’s threats seriously enough to apply the brakes swiftly, just managing to comply with the annual growth limit of ten per cent, coming in at 9.9 per cent for the year.
Whether you think this is a wise move or a misguided property investor ‘witch-hunt’, the fact is real estate buyers are stuck with the ramifications and must now consider the practical implications.
Lenders of all shapes and sizes have acted swiftly, making rapid-fire changes to their interest rate offerings and serviceability criteria across the board.
Some might suggest this keenness to comply hints at a profit to be made amongst all the drama currently playing out in Australia’s financial services sector. Of course that would probably make me…err, some…far too cynical.
Whatever the reasoning behind the hasty side step many banks have made in recent weeks, it’s essential that you know how to get around the new look lending landscape. Particularly when it comes to presenting yourself as a desirable client who can service their debt portfolio.
The conventional cash cow
Cash is the commodity banks want to see more of in credit applications now, along with stable income streams and ‘comfortable’ loan to value ratios.
This essentially means that traditional methods of preserving and optimizing cashflow are now more fundamentally important than they’ve ever been.
Maintaining ‘risk averse’ cash buffers in a line of credit or offset account attached to your mortgage (as opposed to tax deductible property loans), is a great old fashioned approach to making yourself a more desirable applicant in the banks’ eyes.
Generally reducing your debt exposure by paying more off non-tax deductible debt is an easy and obvious cashflow strategy right now.
In this low rate environment, all you really need to do is maintain the repayments on your own home at a higher level – say around the 7 per cent mark – and you’ll be reducing your loan term by years and your interest bill by tens of thousands. All while enhancing your serviceability profile.
How do you rate?
Credit scores and the amount of overall debt you’re attempting to juggle is another one of the conventional ‘go-to’ measures for lenders that’s receiving a makeover right now.
All banks have changed their serviceability calculators, allowing for across the board increases in things like daily ‘cost of living’ expenses. Many have reduced rental income thresholds and LVRs and importantly, almost all lenders are paying more attention to ‘debt with other institutions’.
This means any credit you have access to, will count against you when it comes to how your serviceability is assessed.
This is a good time to do what your parents were probably advised by their bank managers when they were starting out. Save hard, put those savings in the bank you intend to obtain a mortgage through, keep your credit history clean and reduce any credit limits or personal loans as a matter of urgency.
Think about a makeover
Whether a portfolio review could bring about changes to boost cashflow and reduce overall debt exposure, or you have a few tired rental properties that could do with some TLC, now is the time to start exploring pro-active options to strike the right balance between capital and cashflow.
Of course lenders will appreciate you offering them some form of security that has a demonstrated history of strong value growth, but if you can’t prove your capacity to afford it in the first instance, you’re really just pushing the proverbial uphill.
Consider eliminating any underperformers from your asset base. The last thing you need, as an investor trying to grow a successful retirement fund with residential housing, is a money pit failing to pull its weight on the cashflow front.
Likewise, if you have some properties that would provide better income with a few low cost renovations – through increased rent, manufactured equity and depreciation benefits – then this is the moment to pick up a sledgehammer and get your hands dirty.
Whacky ways to kick your cashflow up a notch
None of the ideas I’ve mentioned above are very groundbreaking, admittedly. That’s because we’re almost seeing a hearkening back to ‘days of old’, when you needed to suit up for a visit to the bank manager and impress with a proven history of immaculate, personal financial management.
There are of course other, less conventional approaches property investors would be wise to explore though. Here are a couple of ideas to kick off the creative cashflow/serviceability juices…
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Invest outside your comfort zone
As rental yields across the likes of inner city Melbourne and Sydney take a battering in the wake of escalating property values, this might be a good time to seek out warmer climes and better immediate returns.
Continued low interest rates and burgeoning rental markets around Brisbane and the Sunshine Coast for instance, are currently allowing investors to snap up assets that are virtually cashflow neutral or positive (with yields of 5 per cent plus), but still capable of generating healthy long term value gains.
Right now, take advantage of the fact that you can uncover opportunities where your rent returns are capable of covering all outgoings on your investment property, while still realising excellent capital growth over time.
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Consider a granny flat
Recognising the need to provide more affordable rental accommodation in the increasingly pricey inner precincts of Sydney, local governments lifted restrictions on granny flat construction across the Harbour City a few years ago.
Since then, there has been a marked increase in the number of people using a patch of dirt on existing property to whack up a one to three bedroom unit that, in most instances, pays for itself within the first five to ten years on the back of some very impressive double digit rental yields.
Granny flats are relatively inexpensive to erect, with incredibly quick completion when managed by a reputable company. As such, they can provide a significant, almost overnight boost to your cashflow position.
In conclusion…
It’s highly advisable for anyone thinking about obtaining finance for the acquisition of property to seek professional guidance at this juncture.
The times, they are a changing…and if you don’t remain informed as to what those changes might mean to your personal portfolio position, you may come up against some tricky lender serviceability barriers in the future.
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).