Hi there, my name is Ben Everingham and in today’s video we’re going to talk about what the recent changes to the investing lending market meant to you.
Hi there, my name is Ben Everingham, and I’m the Director here at Pumped On Property and in today’s video we’re going to talk about what the recent changes by APRA mean to investing lending and what do they actually mean, specifically for you, and what effect will those changes have on the Australian market in the coming years.
I thought to kick off today’s video, we’re going to talk a little bit about who APRA is, why they exist and how they regulate the Australian market. Then we’ll talk about who’s going to be affected by these changes, as well as what the changes actually are, and how I think they are going to affect the Australian market longer term. So, let’s kick it off with who APRA is.
So, APRA is an Australian government body that regulates the Australian banking industry and effectively they were born to make sure that the banks don’t overexpose themselves to risks, as banks do get greedy, take as much business as they possibly can, make as bigger profits for their shareholder as they possibly can, and expose themselves to undue risk. So, effectively making sure that we don’t get ourselves into a position where America was, and that the banks can continue to do business and not overexpose ourselves to any unforeseen risk.
APRA was basically created to look after the Australian banking system and to regulate it and to bring in changes or make recommendations to the banks that generally they do follow to make sure that lending sits within a comfortable level and that we don’t overexpose ourselves.
So the second thing I wanted to talk about in this video is who the changes by APRA are going to affect more. It’s no surprise or it’s no secret that they’re targeting investors primarily at the moment, so those include self-managed super fund investors, as well as everyday investors like myself and yourself. The major investors, they aren’t going to be affected because not everybody is going to be affected equally by these changes.
The major segments of the investor market that will be affected will be self-managed super funds that have now got to contribute larger deposits, as well as people with lower incomes unfortunately. People with low deposits, as well, like deposits less than 5% are going to find it increasingly difficult to buy investment properties now. Most of the banks are looking for minimum 10% deposits. They’re also, in terms of the people that are affected, it’s investors with large property portfolios. Now, I’ll get into why those people are affected a little bit more than everybody else in a moment, but they are the primary basis of the investor market that are being affected, so in terms of what the changes are, and I’ll get back to answering the question about investors with larger portfolios in a moment. They’re generally looking for larger deposits, so deposits above 10% is one of the changes that they’re looking for. Obviously, they’d prefer 20% if they can get it, to reduce their risk and reduce the investors’ risk.
Again, they are not writing as much interest on the loans as they were previously, so some banks now, not all banks, but some banks are no longer writing interest on the loans. Some banks are looking for interest plus principal repayments. So, that can obviously affect servicing in the cash flow position for clients or investors, and it can also mean that people may not be able to save as much of this possible income, and buy that next property as quickly because some of that money that they would’ve saved is now going in the principal repayments.
They’ve also tightened up servicing requirements around interest rates, so instead of calculating the rates at the moment based on the three and half to four and a half, five percent rates that you’ve probably got at the moment on your properties, the interest rates that they’re looking at is, seven to seven and half percent now.
So, again, that’s one of very effective measure to knock out a bunch of paper with the servicing. They’re also looking at the yields on properties and taking that into consideration. Instead of looking at, let’s say you’ve got a 400,000 dollar property renting for $400 a week, they’re looking at the $400 rent you’re saving a week and only taking 80% or 70% of that rental income into consideration. They’re also capping the rental yield regardless of how positive a property is at 5% to 6% for most investment properties now. So, all of these things tighten people’s ability to access money, and I’ll talk about why they’re doing that in a moment.
Some of the other things at a higher level that we’re beginning to see as well, is regulations on how many lines and how much debt one bank can write, as well as how many investors can borrow from one bank. So, APRA effectively only wants to see 30% of new business moving forward to the investor market, which means 70% is targeting the owner occupied market that doesn’t buy and sell and speculate as heavy as the investor market. So, that means that certain banks once they’ve hit their quota for the month will just close their doors on all new investing lending, and then you’ll have to look at alternative banks.
So, again, I’ll talk about some of the solutions to overcoming these challenges in a minute, because there’s always a way to continue to move forward or set yourself up in a position to consider moving forward.
In terms of how it’s going to affect the Australian housing market, it’s already having an effect more than anything else on sentiment. And sentiment or the way that I feel about property and the way that I feel about the future of property in Australia, has a direct effect on supply and demand. And so, if people are finding it a little bit more difficult to access money, and the media is talking a little bit more negatively about the property market, then those people that were already considering sitting on the sidelines, might just sit on the sidelines for longer. So, it’s having an effect in terms of dampening investor confidence in the Australian property market, particularly with domestic investors or people that live in Australia. It’s really having an effect on international investors because those investors are coming here for specific rates and then that’s probably because we get strong long-term population growth, jobs and the political system are relatively stable in Australia, and the market is consistently giving returns to investors for a long time.
But the domestic market in the major at the moment, a lot of people are bashing property. For those of you that are thinking about buying and selling in the 12-month period, it’s probably not the time to do that. Those crazy gains that we’ve seen in Sydney, Melbourne, might be over for a small period of time, but for everyone else, who we want to work with, that are looking at 10, 15 year, 20 year investment strategies, then it’s probably an interesting buying opportunity because less demand equals softer prices and that’s a very good thing.
As Warren Buffet says, “Be careful when others are greedy, and be greedy when others are careful.” So, I’m personally using this opportunity and what’s happening right now, which may last 5 months. It may last 20 months. It may last 12 months. It may not even last a month, but to pick up some world-class properties because of that reduction in confidence.
So, in terms of a plan for yourself moving forward, which is always important, the number one thing you can do is partner with the better advisor. A lot of mortgage brokers in the industry have come into the industry because there’s money in property right now, and these guys just don’t have the experience with lenders and these types of environments where it’s a little bit harder and the lenders are just flat out rejecting people because they feel like it, or because they’re complying with the APRA guidelines that they need to. So, find a great advisor if you need one. I’m happy for you to email me directly and I’d happily introduce you to mine. He’s an exceptional guy with a big property portfolio and a long, long term view on property, as well as experiences, so an advisor can really help out.
Also, understanding is a second point in terms of a plan for moving forward, that just because you get a note from your current bank, doesn’t mean that every other bank in Australia is going to send a note to you, and a lot of people give up way to easily. As a young investor in the past, when I was earning a very average income, way below the Australian average, I learned that just because one door shuts doesn’t mean that you can’t either try a plan and save more money and get into the market again when you’re ready or talk to a better advisor or consider a different bank with different lending policies or instead of chasing one of the banks that isn’t writing loans at the moment, to understand the market it would be better and target one of the other lenders.
There’s all types of lenders in Australia, obviously. There’s the full big banks and then there’s a range of second tier and third tier banks. That just means that they don’t write as many loans and so, primarily they’re second and third tier banks that haven’t overexposed themselves to the investor market like some of the big boys have recently. Still writing great loans. I’ve seen loans with 10% deposits, interest only. I’ve seen people with equity in their investment property or their own home get a hundred and five percent loans at the moment. So it’s not all bad that these guys still are running businesses and they still want to make money, and to make money they have to write new business.
So, I just wanted to educate you on some of the changes that we’re seeing. It’s having an effect on certain parts of the market, but it’s opening also some interesting opportunities in others.
Good luck with your lending out there, and if you need a hand, please feel free to go to www.pumpedonproperty.com, I’ll be more than happy to sit down with you for an hour and do a one-on-one strategy session where we can look at where you are and where you’re looking to go, and help you try to plan and introduce you to the right people to help you begin that journey of getting into the market or continue that journey that you’re currently on.
So, until next time. Thanks for your time. Bye.