June 28, 2015
Over the past year, the Reserve Bank of Australia (RBA) has struggled to balance the need to stimulate the Australian economy by lowering interest rates vs. increasing rates to stem the rapidly rising property prices in the Sydney area.
In a recent statement, the RBA commented that “strong investor demand can be a sign of speculative excess, with the risk that additional speculative demand can amplify the cycle in housing prices and increase the potential for prices to fall later. This is particularly the case if that demand is largely based on unrealistic expectations of future price growth, perhaps extrapolated from recent experience”.
To better manage the growing risk of an investment property bubble & to curb the potential of a future property price crash, the RBA and the banking watchdog Australian Prudential Regulation Authority (APRA) are taking coordinated action to ensure that banks maintain sound lending practices towards investors.
In broad terms, banks have been instructed to keep their annual growth in residential investment lending to 10 per cent or less, which means that they have to individually target an overall reduction in the number of investment property loans they can fund in the coming months.
Specific examples of restrictions that banks and other lenders are implementing in their lending rules for investment property loans include:
Using a 6-7 percent interest rate floor (that is, an interest rate buffer at least 2 percentage points above current rates) when deciding whether borrowers can handle future rate rises.
Tightening of income assessments, e.g. not counting 100 per cent of rental income, dividends, bonus pay & other highly uncertain earnings, and removing the negative gearing benefit.
Looking at borrowers' actual spending, not just using a standard poverty-line benchmark which many had used previously.
Curtailing very high loan-to-value-ratio (LVR) lending for investment properties, down to 90% or even 80% in some states.
Maintaining conservative standards regarding property valuations, especially in areas where there has been a significant increase in property prices in recent times.
Introducing restrictions on interest only loans to limit the danger that loan balances will exceed the property value (that is, be in negative equity) if housing prices should fall and if the loan balance is not declining via principal repayments.
Cutting available interest rate discounts for investment property loans (as compared to owner-occupied property loans).
Not all banks and lenders will be impacted to the same extent by these new regulations, and it will be prudent for property investors to investigate all their available options through a reputed mortgage broker.
Please do not hesitate to call me on 0421 206 543 or email firstname.lastname@example.org for a confidential no-obligation discussion on your investment property lending needs.