LENDERS TO THROTTLE INVESTORS AGAIN ON INTEREST ONLY LOANS.
Contributed by Nathan Birch, co-founder of Binvested.com.au.
The RBA and APRA have been sabre rattling more than usual recently, their latest target is interest only loans.
Despite putting a choker chain on the real estate market, it keeps running away from them. And for good reason too!
ALL SIGNS POINT TOWARD GROWTH
I firmly believe there are fundamental forces driving the Australian market and we are not in bubble territory.
With a large chunk of our population due to start retirement soon, house values need to remain stable to retain wealth for retirement and take some burden off the public system.
Additionally, the government needs to import tax paying workers to pay the pension and health care bills which are expected to be huge. This means we need a lot more housing!
Thirdly, Australia is seen as a low-risk place to invest. We have a diverse economy with many trade partners. We are also insulated from many international shocks. Our dollar is pretty cheap, so international investors get good value for money here and a low currency exchange risk.
Due to an anemic economic recovery, interest rates are low in line with the inflation rate. This has been aiding property price growth. It doesn’t look like this will change significantly anytime soon.
GROWTH UPSETS IDEALS OF EQUILIBRIUM
However, all fundamentals aside, APRA and the RBA still feel outside of their comfort zone. Things are not fitting nicely with their models of an ‘ideal world’.
Assistant Governor of the reserve bank Michele Bullock said all the recent efforts were, “focused on the resilience of the balance sheets.”
The fact is the world is never ideal for anyone. The global economic, demographic and political environment right now is very far from ideal. Money markets and investors are looking for a safe harbor, Australia is the answer.
This means that one way or another money has been flowing into the Australian property market, distorting the regulator’s equilibrium.
INVESTORS ON ALERT
APRA flagged interest only loans as the latest target. Interest only loans currently stand at 40% of all loans, they want to bring it down to 30%.
Additionally, APRA handed down these orders onto the banks;
– Limit the volume of interest only loans above 80% loan to value ratio.
– Scrutinize and justify all interest only loans above 90% loan to value ratio.
– Slow investor lending to 10% growth year on year
This latest news has got me on alert. Getting finance has been a common challenge, and I only see finance approval becoming even harder!
I don’t know how quick the finance industry will move into formation against investors, but my feeling is that we don’t have long.
I think that best way to protect yourself from disappointment, and be able to keep buying properties is to have cash on hand.
The banks want to keep making money, but need to show that they are being responsible. These new rules mean cash is king.
If you can offer a prospective lender a large cash deposit, and reduce the risk on their books then they will have a harder time saying no to you.
CLOSING WINDOW FOR EQUITY RELEASE
Your equity is only useful for as long as you can use it. If the bank stops you from withdrawing your equity, you will be stuck on the sidelines and miss out on buying more properties in a moving market.
We’ve seen the last round of APRA restrictions make releasing equity more difficult than in the past. I believe it is going to get even harder.
This is the time to think quickly and release equity now, while you still can.
BUFFERS AND SAFETY
I am not saying there are no risks ahead. In fact, I see a lot of risk in off the plan apartments in oversupplied areas of Brisbane and Melbourne. But, even if the markets do vent some steam, the train will keep going forward.
As we have seen in the past, lending restrictions are little more than temporary speed limits to the market. The fundamental drivers of demand and price are still there.
However, it’s imperative to make sure you are on the winning side of any change. Find out where you stand and what your options are.
Have a sound strategy which includes risk management. exit strategies and safety measures such as adequate cash buffers on hand.
Never take on more debt than can safely be managed. Make sure to deploy that debt in the most responsible and sensible way to take you closer to your goals.
If you’re not sure how to best use your equity, then holding it in an arrangement which offsets the interest is a good policy.