APRA CHANGES – WHAT DO THEY MEAN FOR PROPERTY INVESTORS?
Last year, the Australian Prudential Regulation Authority (APRA) introduced restrictions that have impacted lending for investment purposes. The banks have responded to the APRA changes by changing serviceability requirements on investor loans; making it more difficult for investors to gain finance. Borrowing capacity has been downsized, interest rates have risen and the repayments on existing debt are assessed at a much higher rate.
These restrictions have brought many investors to a halt. Unable to borrow any more, they have been forced to the sidelines despite their plans to invest further. In this socio-economic climate, it is easy to succumb to the bewildered belief that investing is now out of reach for the ordinary Aussie – but is this really the case? The short answer – no. The long answer? Read on.
WHY DID APRA SET THESE CHANGES IN PLACE?
According to Graham Turnbull, Senior finance strategist for Zinger Finance, the main focus of the restrictions is to make lending stricter for investors. Turnbull says, due to the high number of investors buying in areas such as Sydney and Melbourne, demand has pushed up prices to the extent that non-investors, such as Mum and Dad buyers, can’t afford to purchase homes. By keeping some investors out of the market, he says, APRA are aiming to bring down prices and increase affordability for owner-occupiers.
By putting these measures in place, Turnbull says, APRA is also focusing on responsible lending. In order to avoid a similar plight suffered by the U.S. market during the GFC, APRA has prompted lenders to tighten serviceability requirements to make sure borrowers can afford to pay their debts in case of rising interest rates and economic downturn.
According to Tim Wong, Finance Manager for Zinger Finance, the APRA restrictions are working to standardise the lending industry. Previously, he says, there was a greater disparity in the amounts each lender would be willing to lend. Now, there is more uniformity across the board.
In short, the APRA regulations have been introduced in order to slow down growth and increase affordability for owner-occupiers; to protect borrowers and lenders by making sure borrowers can still service their loans amidst changing economic conditions, and also, to standardise and thus strengthen the lending industry.
WHAT ARE THE CHANGES?
APRA has called for banks to hold a larger buffer against their mortgage books, as well as reduce investor lending growth to 10% per annum. So, how have lenders responded to this?
INCREASED LIVING EXPENSES
Many lenders have tightened their household expenditure measures, standardising and increasing the minimum benchmarks for affordability. Even those who live at home with very little expenses are expected to need the same amount to live on as those paying rent and utilities, says Wong.
ASSESSING EXISTING DEBT
When assessing existing debt, lenders no longer look at actual repayments. While a lot of investors with growing portfolios are initially making interest only repayments, lenders will now assess using both interest and principle repayments. On top of this, lenders have increased their assessment rates to between 7.5 and 8%. This means, if a borrower is currently paying off their existing debt at 4.5% with interest only repayments, the lender will assess their debt as if they were paying both interest and principle repayments at 8% interest.
“We have got a few clients who have got quite a large portfolio and, because of the banks taking principle and interest, they are not able to service anymore further debt,” says Turnbull, “They are sitting on the sidelines now until their financial situation changes.”
Many lenders now consider only 80% or less of rental income in assessing serviceability. Some even put an additional cap on how much rent they’ll use for assessment. Negative gearing concessions have also been removed or restricted by some lenders. This two-fold effect of discounting income and increasing expenses can be “quite savage” says Wong. It has reduced the borrowing power of countless investors, making it more difficult for them to continue building their portfolios.
Many lenders now offer investment loans at a higher interest rate to home-loans, reflecting the added risk involved. Some special offers, including discounted rates, have also been discontinued, and “there’s been a real scaling back in the industry on some of the allowable limits” for investing using self-managed super funds, says Wong, with some lenders withdrawing from the market altogether.
TYPE OF INVESTMENT
According to Wong, some lenders are even looking at the types of investments borrowers want to purchase. “There might be some postcodes where they’ll lend less, or take less value as the security value,” he says.
WHAT CAN PROPERTY INVESTORS DO?
So, gaining finance just got a little bit harder – but that shouldn’t stop investors from pushing on and purchasing properties that will bring them closer to financial freedom.
“Now more than ever, it is important to review your existing arrangements,” says Wong.
TIMING IS CRITICAL
“Don’t just wait for things to happen,” says Turnbull, “You’ve got to make it happen and just make sure you’re doing the right thing at the right time to get where you want to be.” The senior finance strategist from Zinger Finance continues, “If it’s restructuring your loan, if it’s having to rework your existing portfolio, if you have to go and release equity – it all boils down to doing it at the right time.”
LOOK BEYOND INTEREST RATES
Both Wong and Turnbull agree that finding a lender who will support your lending needs as an investor is more important than looking at who has the cheapest interest rates. Whether you save a few dollars each month or not is insignificant if the lender you go with won’t allow you to build your portfolio.
FIND THE RIGHT MORTGAGE BROKER
“More than ever, it is important to talk to an experienced and qualified broker to sort through the lenders for you,” says Wong. Getting finance is not a one-size-fits-all approach. Rather, finding a lender who will support you depends on your financial situation and your investment strategy. The brokers experience and skill set needs to match your investment goals. For example, you can ask the broker how many large portfolios they have financed for investors. In addition to this the broker should consult a panel of different banks and you should “Make sure your mortgage broker is frequently looking at your portfolio and, where possible, going in and doing the right thing at the right time,” says Turnbull.
Despite there being a lot of conflicting information out there, it pays to follow what’s happening in the media, says Wong. Even if you don’t quite understand all of the changes that are being reported, following what is happening will enable you to ask more insightful questions that are relative to you and your circumstances.
It is still possible to be successful as an investor. If you find yourself at a standstill, just remember that change is always inevitable. Economists are predicting these restrictions will undergo a gradual softening, and your own situation in terms of income may change for the better as well. If you have chosen your investments carefully, they will continue to perform well. If in doubt, consult your success team to find out the best way forward for you. “Don’t be afraid to ask and don’t be afraid to ask different people,” says Wong. The APRA restrictions may have added an extra challenge for investors, but as any successful person will say – you should never shy away from a challenge.
WOULD YOU LIKE SOME ADVICE?
Do you feel like the APRA changes have thrown a spanner your way? Do you want to release equity or to find out where you stand ahead of your next purchase? Or do you just want to make sure you finance property number 1 correctly so you can freely move onto number 2, 3, 4 and 5+? Then why not get in touch with the investment finance experts at Zinger Finance (www.zingerfinance.com.au). Graham, Tim and the team are available to take your call or book a free consult on 1300 882 022.