The last two months have seen several changes in the housing market, as well as lenders policies. Not all of the changes will affect everyone with a mortgage or looking to get a home loan, but it is important to understand how it could affect you and your borrowings. Whilst many of the changes are designed to impact the investment market through policy and rate changes, the borrowing capacity of many people will also be affected.
The recent crackdown by the Australian Prudential Regulation Authority (APRA) on investment lending, has seen policies and rates change dramatically. APRA wants investment lending to grow by no more than 10% each year and in order to maintain this, changes were implemented as many banks had exceeded this amount. The change with the largest impact is that of the maximum loan to value ratio (LVR) for many lenders is now capped at 80% down from as high as 97%. This has severely affected the amount investors can borrow to fund their investment property and made it much harder to get into the investment market.
In a more recent change, some of the big banks, including Commonwealth Bank (CBA) and ANZ, have increased their interest rates for investment loans. In each case, they have increased the rates by 0.27%, which to put into perspective, would add an extra $600 in repayments per year onto an investment mortgage of $300,000. Matt Comyn, head of CBA’s retail banking services said that the interest rate changes were needed because even with the introduction of policy changes, demand for investment loans was at historic highs. This increase has been implemented in some cases to both new and existing loans. NAB has decided the way they will reduce their investment lending is to increase its interest only loans, commonly used by investors, by 0.29%. As these changes have only been introduced recently, many of the banks may follow suit in order to reduce the growth of their investment lending books.
The other major change in the industry is the way lenders are now assessing your details, mainly income, which will have an impact on your borrowing power. Lenders have decreased the proportion of income able to be used in servicing for rental and investment incomes, as well as allowances and overtime payments. Previously, many lenders would accept 100% of the above incomes, but now many are cutting down to 80% or even less when they calculate your borrowing potential. This is a way that a lender can be confident that if your income was to decrease in any way, that you can still afford to fund the debt that you have.
Floor Rates (servicing rates)
When a lender calculates your borrowing capacity, it will quite often use a floor rate instead of the actual interest rate. With rates as low as they are now, and many people on 4.5% or less, this leaves the bank at a higher risk if rates were to increase. Some people may be forced to default on the loan because they simply can’t afford it. Adopting a higher rate for serviceability now, currently around 7-8%, shows the lender that you can afford the repayments if the rates were to increase to this rate at some stage throughout the life of your loan. Using this higher floor rate will decrease your overall borrowing power, but will give the bank confidence that you can afford the mortgage if you were to pass their serviceability tests.
With all the changes mentioned above, the home loan market has never been more complex. It may be worth your time to sit down with a professional and ask whether any of these changes will affect you and if so, how. Please contact Steve on 0433 124 081, or email at email@example.com and he can answer any questions you may have to find the right loan product for you.