THE CHANGING WORLD OF PROPERTY INVESTOR FINANCE
Australia’s second largest supplier of property investor finance, The Commonwealth Bank of Australia recently ceased lending to property investors wishing to switch banks and refinance.
More recently, APRA is putting pressure on banks to reduce interest only loan approvals, in addition to existing restrictions around serviceability and loan to value ration.
Both these moves have left many wondering what the future looks like for investor finance.
According to Nathan Birch, it is now more important than ever to have the right finance strategist behind you at every step of the way.
THE COMMONWEALTH SAYS NO
According to APRA, the CBA is the second largest lender to property investors in Australia.
In December 2014, APRA told the big four banks that their investor lending growth must not exceed 10% per annum.
This cap was needed, said APRA, to ensure the long-term sustainability of the mortgage market.
The cap was also meant to slow down property price growth – which, many feared, was soaring out of control.
The CBA maintains that this policy change is due to “regulatory commitments.”
While the bank has not breached the 10% cap since it was announced at the end of 2014, recent figures show that housing investor growth in Australia has scraped below at an annualised rate of 9.1 % over the latest quarter.
INVESTOR FINANCE IS GETTING TIGHTER
This latest move by Australia’s largest bank is just one of many changes that has made it more and more difficult for property investors to build a portfolio of 10 plus properties.
Most banks have changed serviceability requirements over the past 18 to 24 months in order to discount income and ramp up expenses. Assessment rates are much higher than actual rates charged on existing debt and new finance.
Many will judge, for instance, whether a borrower can service principal and interest repayments at 7.5 % when the loan itself is at 5 % with an option to pay interest only.
This is prudent lending at its best – and when you think of the subprime mortgage crisis that unfolded in the US, it’s better to be safer than sorry.
WHAT SHOULD INVESTORS DO TO OVERCOME THESE HURDLES?
It is important to work with the market we are given, says Nathan. While it may suck for investors, these changes have been put in place as a safeguard.
Long-term investors should be thankful, the APRA is actually looking out for their long-term interests. Unfortunately speculative type investors are the ones most likely to get burnt.
Complaining that it is too hard will not get you anywhere. Instead, it is necessary to get yourself a knowledgeable finance strategist. They can help you figure out how to get the finance you need to make your dreams a reality.
Then you will be able to uncover the best opportunities to move forward and build your portfolio, while those who limit themselves with negativity are left right where they started.
PROPERTY INVESTMENT AND FINANCE TIPS
- Protect your credit file by making all repayments on time and avoid taking out unnecessary new loans like car, credit card or personal loans.
- Cancel your credit cards if you can. Regardless of whether you actually use your credit card or not, a card limit of $8,000 could reduce your borrowing power by $40,000.
- Maintain a loan to value ratio of less than 80% and use 20% deposits on any new properties to avoid finance hurdles.
- Make sure to think ahead and balance your portfolio for equity and cash flow to avoid getting stuck.
- Don’t chase the lowest interest rates. Look at the back end of the loan on offer to see if it suits you.
Have you had trouble getting finance since APRA tightened lending for investors? Please share your experiences in the comments section below.
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