September 14, 2015
The property market has experienced significant changes over the past month or so which affect property investors to some degree. APRA (Australian Prudential Regulation Authority) has taken an interventionist attitude and introduced directives aimed at curbing investor borrowing due to significant growth. APRA has set general targets and leaving it up to each Lender to decide how they can best do what APRA have requested. APRA were not really concerned about property prices as their aim was to ensure the stability of our banking section (their job of course).
Back in December 2014, APRA recommended the banks restrict the annual growth in investment loans to 10% or less each year. But this seemed to have minimal effect on investor loan approvals, so APRA in May this year tightened up on the financial Lenders to significantly change lending policies for investors only. Then in June, APRA released a temporary directive to major banks to increase the amount of capital they hold against residential mortgage exposure (meaning that they have to hold billions of dollars instead of lending out as loans). This has resulted in higher investor interest rates and reducing investment mortgage volumes.
In order to achieve these Investment directives from APRA, the following changes have been made by the lenders:
- Lower LVR (often to 70%-80%) loan-to-value ratio requirements
- Higher Investment loan serviceability calculations
- Removal of negative gearing concessions from their calculations.
- Removal of discretionary pricing on investor loans – in other words raising interest rates for investors
- Tighter control over foreign investor loans
For investors, this essentially means the need for a bigger deposit and an increased onus on proving their ability to service the loan throughout its term.
One area of concern for Investors are those that have already purchased Off the Plan in the last 2-3 years – when they purchased and lending scenarios were calculated, they “serviced” their new loan at that point, and now when coming to the end of construction with the complex their Unit has been purchased in, Banks have tightened the ability to “service” the loan by lower LVR calculations, higher interest rates and even Valuers are “upping” their conservatism.
The end result wanted by APRA is slowing property price growth in the Investor space (especially Sydney and to some extent Melbourne) which may have the effect of capital growth slowing over the next few years. The rate of growth in 2015 has been unsustainable, so slower growth means an increased likelihood of an “economic gentle landing”.
So Investors now require a higher deposit and contribution to the loan settlement which means “serious investors” rather than speculative first-time investors are not affected by the high loan to value ratios and the need for lenders mortgage insurance.
Existing Investors have been “hit” with an increase in their interest rates (unless they had fixed rate loans). However, Investors with strong incomes and good equity are still able to obtain loans to add to their portfolios. But some existing investors with multi property portfolios who plan to release “equity” to purchase another property may find it more difficult to obtain their “equity” due to the new serviceability requirements.
The end result is a cooling down of the investor segment of the property market which in itself is not a bad event as the Investor market was growing too rapidly and too strong too quickly in specific locations.
However a number of lenders have decreased the interest rates to their owner occupied P&I home loans at 80% lending (or less) – even to 3.99% variable.
Due to the complexity of loans more borrowers are visiting their local Mortgage Choice Broker to assist through the maze of issues and to ensure they have sufficient savings, maximum borrowing capacity and making sure no unexpected problems.
If you’re looking to buy a new home there’s probably never been a better time with the low rate environment, and if you’re a long-term property investor, there will be some great opportunities in the slowing investor market.
To discuss your property plans, give us a call on (03) 9646 7973 or mobile 0402 884 506. Our friendly, helpful & professional team at Mortgage Choice Port Melbourne at 146 Rouse Street are ready to assist.