Your looking to buy your first / next investment property / home.
You had a pre-approval for $500,000 in place 4 months ago that’s expired. You ring up your bank manager or broker to have it re-instated – only problem is they tell you you can only borrow $250,000 because of some changes made by someone called APRA.
Who is APRA?
The Australian Prudential Regulation Authority (APRA) is the prudential regulator of banks, insurance companies and superannuation funds, credit unions, building societies and friendly societies.
Why did APRA recommend changes to investment lending?
APRA recommended changes to reduce the amount of investment lending by banks.
APRA’s recommendations make it harder for some investors to access finance and as a result aim to slow down the number of investors entering the Australian property market.
With historically low interest rates in play APRA deemed the risk to investors and lenders to be too high when maximum borrowing is being sort.
In a nut shell APRA is trying to take the heat off the Australian property market by making it harder for the average investor to borrow money.
How long will these changes to investment lending last?
Unfortunately know body knows at this stage. It could be 12 months or 5 years.
Who’s most affected by APRA’s changes to investment lending?
- Low income earners
- Middle income earners
- Those with high LVR’s (loan to value ratios) – high debt / low equity
- Those with more than 3 properties
Who’s least affected by APRA’s changes to investment lending?
- High income earners
- Those with low LVR’s – low debt / high equity
- First home buyers
- First time investors
- Home buyers
What do these changes to investment lending mean for me?
APRA has introduced maximum amounts of investment lending for each lender as a percentage of their overall lending (some lenders are currently over their allowed quota due to their appetite for lending in recent times).
As a result of these changes most lenders are recommended / required to make changes to their policies to reduce their investment lending ratio.
Some of the recent ‘common’ changes we are seeing as follows:
- Reductions in maximum LVR’s
Most lenders have now reduced LVR’s on investment lending to 90% with many lenders reducing LVR’s to 80% maximum on investment lending (even some of the major lenders like Westpac).
That said there are still have a couple of lenders who will do a 95% maximum LVR – unfortunately its still unknown if this will last.
- Increase to the ‘servicing rate’
When a lender assesses the affordability of a loan (servicing) they will use a ‘sensitized rate’ (rate approximately 2% higher than what you will actually be paying) this is a ‘buffer’ to allow for some increase in the rate over the life of the loan.
The minimum serviceability rate has now been set at 7.25% by most lenders.
Say you just fixed your home loan at 4.5% for the next two years the bank will still look at your serving rate like you are paying 7.25%.
- Servicing on existing home loans
In recent times we’ve had lenders who, when calculating servicing for a loan, would calculate the existing repayments on other home loans at actual repayments rates (even when your loan was interest only).
We are now seeing lenders who would once do this, change to service existing debts at the sensitised rate (7.25%) on ‘Principal and Interest’ repayments.
Therefore even if the loan is currently set at interest only payments, the repayments are calculated at P&I over the remaining term once I/O period expires.
$400,000 loan I / O @ 4.5% = $1,500/mth (5yr I/O 30yr term)
The lender would now calculate this repayment as an expense at $2,891 (25yr remaining term 7.25% P&I).
As you can see from this example, the liability on the servicing calculation has almost doubled, and this is just on one loan!
Keep in mind the cost to you has not changed, just the way it is calculated as an expense.
- Reduction in maximum rental return
Most lenders have now introduced maximum allowable rental returns that can be used in servicing calculations.
Typically the maximum most lenders will accept now is 6% gross return on a residential investment property regardless of high your rental return actually is.
- Increase in interest rates
We are also beginning to see lenders reduce the rate discounts they are offering for new investment lending. With some lenders starting to ‘load’ the rate for any investment lending at high LVR’s.
Whilst this doesn’t necessarily change the amount you can borrow, it does however have an effect from a cash flow perspective when looking at various properties.
The above information is generic in nature, and intended to give a brief overview to some of the more recent changes effecting investors when trying to achieve maximum lending for investment.
These changes have mostly had an impact on the larger banks, who’ve, in the past been more accommodating of investor lending. Many of the more conservative smaller lenders have had the above policies in place for many years.