Investment loans – new regulations

There’s been a lot of media coverage about the present lending market in Australia that brings to light the fact that it’s much harder to get a loan today than it was before, especially when it comes to investment property. Let’s look into the reasons why the current investor lending market is bleak in comparison to lending for owner-occupied properties.

New APRA regulations imposed on investor lending

APRA (Australian Prudential Regulatory Authority) is the regulatory body of the banks. It has imposed new restrictions that primarily affect the investor lending market. For instance, banks aren’t allowed to increase new lending to investors by more than 10%.

These are the primary reasons why present-day investors feel more pressure when it comes to getting a loan approved. What they could do before and what they could borrow is potentially not available anymore.

With investor lending taking a hit, opportunities for owner-occupiers increase

By default, APRA’s new regulations create more opportunities for the owner-occupiers. To keep investor lending percentages in check, banks are trying to increase their homebuyer loans. This puts owner-occupiers in a better position because they are being offered more favourable terms when it comes to getting loans approved.

APRA’s tougher conditions aim to even the scales between the lending & property markets

The lending market or the availability of loans has quite a significant impact on the property market, it probably even leads to a property bubble. In recent years, we’ve seen some extraordinary rates of growth in the property market, especially in Sydney and Melbourne. A lot of that has been driven by the investor market, low interest rates and availability of capital from the banks.

The regulator always looks at achieving a healthy growth in lending, in order to temper the creation of unrealistic property prices. So, from APRA’s perspective, there is an increased risk in the lending exposure in the midst of fluctuating property prices, which is why they think it is prudent for banks to avoid excessive loans to investors.

Also, they don’t want to give rise to a situation where the actual home buyers are nudged out as a result of this increased demand for property, which may be artificially driven by the investor market. So, APRA’s restrictions are more about getting the balance right, to make it a level playing field for everyone.

Bank policies on interest-only loans are also in the spotlight

The regulator is also trying to hold banks accountable for responsible lending practices. If everyone was to go out and get an interest-only loan, then at some point that loan, principal included, has to be paid back. And, if there are corrections in the property market along the way, the borrowers may be left with loans that are higher than the value of the property they bought due to market cycles, and that creates a heightened risk.

Borrowers may be forced to sell the property at a point where there can no longer afford the loan. Interest-only loans do give rise to a false sense of security for the borrowers because their repayments are affordable at the current rates of interest. But if interest rates go up and their interest-only term finishes in five or even ten years, they may not be able to afford those repayments.

APRA is also very strict when it comes to bank policies on interest-only loans. For instance, previously if I were to borrow from a new lender, I only had to disclose if I had any existing loan, the repayments I’m making on that loan and the current rate of repayment. If I was paying interest-only repayments on those loans, the new loan would be comfortably serviced because I would show that my current repayments were a captive amount.

What’s changed now is when I apply for a new loan, the bank is going to assess my existing loans at a rate of repayment that is based on possibly 7.5% interest rate and also on a principal-and-interest repayment basis. They will no longer consider interest-only repayments. Which means it’s going to be a little more challenging for me to get my next loan approved. When it comes to being assessed for new borrowing, I’m going to be assessed on the basis of a higher interest rate and the fact that I’ve got to pay them off on a principal-and-interest basis over the remaining term of that loan, which could be 25 years.

Be prepared for in-depth scrutiny for any loan, not just investment loans

Interest-only is popular for investment loans. But in the present scenario, you could face problems if you want loans for a home upgrade, renovations or other similar requirements.

You may look at your current repayments and think that you can comfortably meet the requirements of a new home loan based on your cash flow and the equity you possess. But with the new policies, banks will scrutinise all the debts that you currently have with harsher criteria. If you have an existing investment loan, repayments would be calculated on a principal-and-interest basis at a higher rate. They will also consider your credit card debts (where high interest rates will be factored in), personal debts, car leases etc. While calculating projected repayments, which will in turn, impact your borrowing capacity.

Get yourself in a better position that will allow you to borrow money

Look at all your debts, including store cards that give interest-free finance. Once you’ve listed them, try and pay off some debts sooner rather than later. In the meantime, use your surplus savings to pay down your home loan. The fewer liabilities you have to service, the better your borrowing capacity will be when it comes to your next loan application.

Get more information from your financial adviser or mortgage broker

We are always willing to lend a hand. We can give you relevant advice that prepares you for a loan application, because if you apply for credit and get knocked back, this may raise a flag in your credit file that will be pulled up when you apply again. So, it’s best to get a realistic ballpark figure, based on your current capacity, income and outstanding debt. And, plan a strategy to ensure that your loan gets approved. This will help you ensure that there are no nasty surprises in store for you when you put in that application.

I have an amazing opportunity in my financial advisery role to make a difference to people’s lives by helping them to achieve what’s important to them.