How changes to investor lending will affect you
Melbourne, the most liveable city in the world. It has a nice ring to it, don’t you think? Of course, there’s the food culture, education, and infrastructure, but it’s Melbourne’s real estate market that has homebuyers and investors lining up to get a piece of the action.
And who could blame them with a growth rate of 11.5% in the past 12 months and an annual growth rate of 7% per annum for the last decade. Right?
Enter the Australian Prudential Regulation Authority or APRA, Australia’s prudential lending watchdog. Property markets nationally have been put on notice in an effort to stymie lending risk, amid fears speculative investing in Sydney – and to a lesser extent Melbourne – is causing a property bubble.
The decisive action from APRA, and subsequently lenders, has many people asking, “what are the changes and how do they affect me?” In an effort to clear things up, let’s take a look.
If you’re a would-be first-time investor, unfortunately you’re at the helm of the impact. Changes to lenders’ policies now make obtaining finance more difficult – for starters you’ll pay higher interest rates, be subject to a lower loan to value ratio (LVR), which means you’ll need a higher deposit or equity, and you’ll be subject to greater scrutiny when assessing your ability to service debt. In addition to this, some lenders no longer account for a property’s rental income when assessing mortgage serviceability, while others may request additional security.
Naturally, these hurdles first assume the bank hasn’t already met their growth target for investor lending, which would mean they couldn’t accept new business.
If you’re an existing investor, things aren’t so bad. Sure you’ll likely pay a slightly higher interest rate too, but you may be able to skirt tougher restrictions regarding LVRs by using equity in existing assets. Your lending track record may also benefit – or hinder – your demonstrated ability to service debt and grow your portfolio.
Then there’s those considering buying property within a self-managed superannuation fund. Obtaining finance could prove problematic under new conditions, particularly with some institutions withdrawing this type of lending altogether.
Homebuyers are the clear winner from recent changes. They’re receiving some pretty attractive interest rates – the banks’ way of recouping business lost from investors.
But, it’s not all rosy. Some lenders are now stress-testing loan applicants, both investors and homebuyers, at interest rates of 8%, to limit the banks’ exposure when interest rates inevitably rise down the track.
While new lending conditions will make obtaining finance more difficult for some buyers in the future, they are having an immediate impact on buyers currently awaiting settlement – namely for property bought off the plan and house and land packages, due to the disparity between contract price and market value.
The resulting funding gap from these sometimes higher risk properties, plus tighter lending conditions means buyers may be unable to fund their purchase, losing a substantial deposit in the process.
The bottom line
There’s no debating prudential lending practises are important for economic stability, but it may not be without consequence to market performance in the long run, particularly for Australia’s poorer performing housing markets. But, fortunately for the most liveable city in the world, there’s been relatively little sign of easing in activity from Melbourne buyers with markets expected to improve further this spring.
To avoid dismay as the impact is realised, would-be buyers, and those awaiting settlement, are urged to reassess their financial circumstances to ensure they meet the requirements of the new lending guidelines.
By Greville Pabst, CEO, WBP Property Group.