In December last year, the Australian Prudential and Regulatory Authority (APRA) advised authorized deposit-taking institutions that investor mortgage portfolio growth “materially above a threshold of ten per cent” would be seen as an “important risk indicator” in considering the need for regulatory action.
Despite their continued threats regarding macroprudential intervention however, APRA’s analysis of banking statistics from May indicated that the magic 10 per cent margin wasn’t being taken as seriously as they’d hoped.
ANZ’s residential property loan book grew at an annualised rate of 12 per cent for the month, with all the majors (aside from Westpac) allowing investor loan activity to rise beyond 10 per cent, along with AMP, Macquarie, ME and Teachers Mutual Bank.
APRA took a hard line approach in response to the data, cautioning that lenders who didn’t adhere to mandated restrictions on investment borrowing at 10% or less of all loan settlements could force the imposition of formal credit sanctions.
The fallout has been almost immediate; with EVERY investor set to notice potentially significant changes to their cashflow, and their capacity to continue accumulating high growth, highly geared property.
As such, we felt it necessary to sit down with our brokers and get a professional insight as to how this transition in lending practices is playing out and importantly, what you can do to protect your portfolio now and in the future…
What Curtis Lunney says about serviceability…
The biggest change our Trilogy team is noticing is in the banks’ serviceability models. Negative gearing ‘add backs’ have been removed from cashflow assessment and increased buffers are being applied to interest rates.
Quite often the interest rate might be 4.5 per cent and the banks are adding 2 to 2.5 per cent as a servicing buffer on top of that.
So they’re applying interest rates of around 7 to 7.5 per cent for servicing calculations within a principal and interest arrangement, without considering interest only at all.
Moving forward there’ll be greater emphasis on an applicant’s income, whether that’s through PAYG earnings or rent rolls, and a greater focus on external income sources to make the client’s portfolio sustainable.
Curtis says consider gearing…
One way around this is to gear yourself at a lower LVR once you start accumulating a few properties. So instead of running at around 80 per cent, you might look at how you can reduce that to say 60 or 70 per cent. This will also provide a higher rent to repayment ratio and help alleviate some serviceability issues.
Overall, investors still need to weigh up the offset between capital growth and rental yield when determining their capacity to borrow. There’s no point buying property that’s going to increase in value exponentially if you can’t hold onto it over the first year or two, while experiencing that growth.
This has always been the case and continues to be today, it’s just that you have to focus a little more on income because now when applying for a loan, cashflow is as critical as capital.
Curtis says plan ahead…
Short-term gains cause long-term pain and you need to be more mindful of that in this lower interest rate environment.
As rates start to go up, whether it’s next year or the year after, consider what impact that has on cashflow.
Look at having buffers established, as well as possibly even fixing part of the portfolio to make sure you minimize any negative impact on cashflow.
Curtis says reduce non-investment related debt…
Now is the ideal time, if you do have investment properties, to pay extra off your home. Make the monthly mortgage repayments on your PPOR as if it the interest applied was at 7%, as opposed to the mid 4’s it actually is right now.
That way you get ahead quicker and build up extra equity, plus as rates go up you’re already prepared to make those higher repayments.
If you don’t have any personal debt or home borrowing, accumulate more buffers in offset or redraw type facilities, which again increases your equity, but also gives you a cash reserve to deal with rate rises.
Curtis says there are still deals to be done…
All banks still have different discounts and inclusions built into their packages; they’re just not doing any deals above the carded rates.
The key is to look at what other features come with the loan, such as offsets, redraw facilities and the like, as they can be more important than the actual interest rate, particularly for investors. Sometimes taking a cheap rate can cost more in the long run.
Ken Gibson says it’s not all about interest rates…
Securing the best loan product for a client means asking the right questions at the outset:
- Is the property you’re considering for owner-occupier or investment purposes?
- Where do you see yourself in the next 5 to 10 years?
- Are you eligible for assistance like the first home owner’s grant or stamp duty concessions?
- Do you prefer Interest only or principal and interest repayments?
Ken says size matters…
Although a lot of lenders, like BankWest for instance, have dropped their LVR cap to 80 per cent for investor borrowings, we know of some institutions who’ll still do up to 90% for property investment purchases.
If you have other property, particularly owner occupied, we can potentially restructure your portfolio to get a better deal on your PPOR in order to offset some of the additional investment property debt you’ll have as a result of interest rate increases that may be applied to your existing and future loans.
With the banks trying to rebalance their books in line with APRA’s 10 per cent requirement, there are some really good deals going for owner occupied properties, including St George at around 4.19% on a no frills, basic home loan with no application fees.
Deanna Ezzy says the changes will impact ALL property purchasers
All lender-servicing calculators have been changed across the board, which has basically reduced everyone’s borrowing capacity.
Lenders have also raised their buffers. So their generic servicing calculator might have previously allowed $1500 a month for living expenses for a single person with one child, whereas now those expenses have been increased.
The calculator changes will impact investors a bit more, because the main thing that’s been revised is that existing debt at other institutions – typically investment debt – is now calculated at a higher buffer.
Some lenders have also capped rental income on premium properties (around the $1 to 2 million mark) and the NAB has a maximum 6% yield rule, meaning if you have a house and granny flat that’s generating 8 or 9%, they’ll cap that at 6% and then take 80% of that 6% yield.
These rental income allowances shouldn’t impact too many investors however, because most are achieving around a 4.5 to 5% maximum rental yield anyway.
Additionally, interest rates for investment lending are now not as good as those applied to owner-occupier mortgages.
Deanna says OTP investors are at risk…
People who bought off the plan six months ago will now be required to have all the numbers run through these new servicing calculators when it comes to settlement time, and I guarantee a lot of investors and owner-occupiers aren’t going to service on these contracts.
Deanna says it’s time to invest outside your comfort zone…
I have heaps of clients in Melbourne who are heavily geared and getting pretty ordinary 3 per cent rental yields, which could see some of them hit a major servicing wall in the near future.
They might need to reconsider their strategy and start looking at positively geared property to help with cashflow and serviceability, such as granny flats and other ways to generate more rental income. Whereas this wasn’t quite so important a year ago.
Maybe have a look at buying in another state where rental yields are higher. In Brisbane you can purchase something really good for around $500,000 and still achieve rental yields of about 5.5%.
Unless you have a huge PAYG income, you’re going to need both strong cashflow and capital in order to achieve serviceability under these harsher requirements.
Deanna says professional guidance is more essential than ever…
The need to talk to a broker is required now more than ever. There are still a few variations between how lenders calculate your serviceability.
Even though they’re all much the same and it’s been made a lot harder, some lenders will be a little more generous than others. But this is generally not common knowledge.
So consult a broker first, particularly if you’re looking to buy a bunch of properties over the next ten years, because you need to be extra careful now as to how you finance those first acquisitions in order to continue investing down the track.
Deanna’s top tips for today’s borrowers
- If you have massive credit card limits – reduce them. If you need credit cards to access cash, deposit the money into a low limit card of say $1000 so you still have funds available without it impacting your serviceability. Try to keep all other debts at a minimum.
- Demonstrate a good savings pattern. When people come to see me about 6 months before they’re ready to buy, we determine which lender they’ll go through, say the Commonwealth Bank for instance, then I advise to move all their savings across to them and open a $2,000 credit card and become an existing customer. That way, in 6 months time when you apply for a loan, the bank can see your income, your savings history, that you’ve been paying your credit card back every month and you’re an existing customer – they know you. Suddenly you’re a lot more attractive. Again, this is something that’s not necessarily common knowledge unless advice is sought from a broker.
- Keep yourself stable in terms of your residential address and employment history and your credit file clean. Don’t apply for multiple balance transfers on credit cards, because it just looks like you can’t afford the debt.
It’s really back to basics when it comes to serviceability – especially when you’re buying an investment property.
Given the significance of this lending revolution and its impact on both new and established property investors, it’s more important than ever to seek counsel from a suitably qualified mortgage broker.
To speak with our team and find out how you can successfully navigate this new lending landscape, click here now or call 1300 657 132 for a confidential discussion as to your current situation and how you can best finance any future investment plans.
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).