September 15, 2015
The recent clamp down by APRA on investor lending has seen the introduction of lender policy designed to stifle lending to investors and limit investment lending growth to 10% per lender
One of these policies introduced was the way in which existing debt was treated for assessment purposes on the calculation of your borrowing capacity.
The majority of lenders are now effectively loading existing debt twice and this greatly reduces the borrowing capacity.
Let’s explore the numbers to see how this works.
Assume you are an investor with Interest Only debt on an existing investment property, or even your owner occupied home, of $500,000. At an interest rate of 4.5% - your repayments would be $22,500 per year – or $1,875 per month.
The first loading occurs when the lender converts this Interest Only debt to Principle & Interest for assessment purposes. The repayments on a loan of $500,000 on a 30 year term at 4.5% interest would be $2,533 per month. This effectively reduces your assessable funds for servicing by $658 per month. And you can service a lot of Interest Only debt with $658 per month - $175,466 in fact at the same rate.
The second loading is the assessment rate applied to these newly calculated repayments. This varies from lender to lender and typically falls in the ranges of 6.8% to 8%
We have at least one lender on our panel that is leaving existing Interest Only debt at the current actual repayments. This effectively means that rather than twice – your existing debt is loaded only once – and the difference in borrowing capacity is significant.
I recently had a client that I successfully got approved for an investment loan of $799,000 under the new policy. The next highest amount was $680,000 and most of the big 4 banks came in at $350,000. This was the difference between my client being able to purchase his desired property, or not.
If you are an investor and have experience similar challenges with your borrowing capacity – please phone me today on 0414 259 699