The residential lending landscape has been slowly changing and in the last month there have been significant moves by lenders that are bound to have an effect on new investment lending and subsequently, (as APRA and the RBA I’m sure hope) the Australian residential property market.
The Australian Prudential Regulation Authority, APRA, has been reviewing the lending policies of Australia’s banks, credit unions, building societies and other bodies. APRA acts as the overseer and regulator of Australian lenders and funnily enough it is majority funded by the very lenders it oversees. I’ll leave you to decide on how arm’s length that is and if there is any influence being held either way.
While APRA has been around since 1998, it has only been in the last 12-18 months where lenders have been continually referring to them and how they are auditing, restricting and introducing new requirements and fines to these extremely profitable lending institutions.
How Does this Effect Property Investors?
Well now APRA has residential property investors firmly in its sights. While the RBA reduces interest rates to record lows to stimulate spending and growth, this in turn makes investing an extremely attractive option to many Australian investors. When you can lock in a 5 year fixed rate at 4.24% on your investment property and then sit tight while capital growth and increasing rental returns not only build you significant equity but accelerate the ability to have a cash flow positive asset.
Now the RBA and the Australian press are complaining about the “un-affordability” of some sectors of the Australian property market. While Melbourne and Sydney in particular are in a strong growth period, not all of Australia is experiencing such strong growth and as we have discussed previously, the property cycle can be in different stages in different markets within the same state or city. The cost of property in some capital cities does seem to be increasing and the commitment to a mortgage out of the monthly budget has grown.
So where are we at when one government body is trying to encourage spending and growth while another is trying to do the exact opposite to make property more affordable for owner occupiers and first home buyers? Well last week several of the bigger lenders announced that they would stop providing interest rate discounts on investment loans. With rates being at all time lows, I am not quite sure how this is going to be much of a deterrent to would be investors. What will a 0.2% or 0.3% difference in interest rate do to some seasoned investors who have experienced pre-GFC rates of 8-9%, little I would have thought.
There have also been some subtle credit policy changes that have attempted to curb the ability to borrow for residential lending. Some lenders have reduced acceptable rental returns, removed negative gearing benefits and increased the cost of living expense. However the real bombshell occurred this week when BankWest announced that they would reduce all residential investment lending to a maximum Loan To Value Ratio, (LVR) of 80%. As a bit of background, BankWest have always been very aggressive in the residential investment lending market, in fact being one of the last lenders allowing full Lenders Mortgage Insurance capitalisation. In some instances, borrowers could borrow 95% of the property purchase price and add the LMI to the loan, bring the LVR up close to 100% of the property value.
So for BankWest and many investor borrowers, big changes are at hand. The ability to highly gear your investments is being scaled back meaning bigger deposits and higher interest rates. Just think about these new requirements from BankWest, requiring 20% of the purchase price plus funding the appropriate Stamp Duty just to be able to secure an investment property. I can just see some of the higher ups in BankWest waving goodbye to those volume bonuses.
I’m sure BankWest won’t be the only lender requiring increased customer contributions which will make things more difficult for many investors, especially those first timers. So APRA seems to be applying significant downward pressure on the lenders to reduce the risk profile of their residential lending portfolios. As always, the industry and the market will adjust. It might even be a subtle win for many lenders and their shareholders with the lenders adding an extra few basis points to residential investment loans, increasing profit margins.
So what do you do now?
Can you just walk into a bank branch and expect to be fairly confident in knowing you can secure the appropriate finance for your purchase, refinance or equity release? The short answer is no chance. Each lender and their policy are starting to differentiate greatly and the savvy are onto this. The Mortgage Finance Association of Australia announced this week that 52% of all new home lending was generated through the mortgage broking network. This percentage is bound to grow as lending becomes more restrictive and complex, the ability to assess the credit policy from a range of lenders rather than one means that having a competent and experienced mortgage broker will now be a must for any investment borrower if it wasn’t already.
Keep an eye open for further changes as the Australian government continues to interfere in an extremely important sector for the Australian economy. How long they’ll be able to to walk the tightrope is any ones guess.