If you’ve been keeping an eye on the property market over the last few months you will no doubt be aware of the recent changes made to borrowing conditions. Change is a scary word and we are often accustomed to it bringing red flags and less money in our pockets. While the conditions may have been tightened, if you know what you’re doing, change can provide new opportunities.
So, why the change?
Driven by the concern over bank’s lending to investors, APRA (the Aussie financial regulator) has confined growth in investor loans to 10% annually. Thank the ever rising property values in Sydney and Melbourne for that one, which have been growing in double digits over the past couple of years. To put it simply, banks have had to slow down the number of investment loans they receive and to do this, they have implement certain measures to stop the influx of investment loans.
What is the change?
APRA have introduced enforceable measures to ensure the lenders are willing to keep to this more conservative lending model. These changes include raising interest rates for investment loans, increasing the assessment rate on their servicing calculators making it harder for people with existing debt to get new finance, taking away negative gearing as an add back which has always been positive for investors, and minimum living expenses has increased across the board for all loan applications. All these changes were to satisfy APRA and the data suggested it worked as in the last quarter of 2015 investment lending applications decreased. So, while the big lenders have to be more cautious with their lending because of these strict new guidelines, it opens a door for second tier lenders to be competitive as they are not as affected. The policy changes are here to stay, but the interest rates for investment loans can come down as certain banks investment loans drop below that 10% growth. We are already seeing some investment loan interest go back to owner occupied rates in the early part of 2016.
What does it mean for investors?
With the rising interest rates, consumers with an existing loan will be paying more. If you are looking to buy, chances are your borrowing capacity will be reduced, particularly if you have limited equity or savings. Pre APRA changes, some lenders would accept actual repayments for servicing purposes when applying for new loans, whereas now those same lenders add a buffer of approximately 3% and assess at principal and interest repayments, even though most investors pay interest only.
Why is this a good thing?
So far, it’s not sounding great for investors. But we choose to see the silver lining. The tightened lending conditions can actually be an opportunity for savvy investors, something the Entourage Finance team can help you take advantage of. With the expected decrease in competition in the investor property market that the lending changes will bring, investors should be able to secure purchases for less overall. That means borrowing less and a possible increase in rental yields.
Now more than ever it is important to surround yourself with a team in the know who can help you navigate not only the ever changing property market, but also the changing lending conditions as well. Lending conditions aren’t expected to get any easier through 2016 and the Entourage Finance team can help place you in the best position to reap the benefits of the silver lining among all these changing clouds.
Damien Roylance is the director at Entourage Finance