In March 2017, the Australian Prudential Regulation Authority (APRA) announced new measures around residential mortgage lending in order to curb investor borrowing.” These industry-wide regulatory changes apply to all lenders in the industry and potentially all property investment loans.
In this special report we look at the ins and outs of the new APRA rules and how they could affect your current or future investment plans.
Why are these changes happening?
APRA’s new regulations are part of an ongoing response to what APRA describes as an environment of high housing prices, high and rising levels of household debt, slower income growth and historically low interest rates.
There is also a concern that the high demand from property investors in markets such as Melbourne and Sydney are pushing prices to the point where ‘non-investors’ including families and first-home buyers are finding it more and more difficult to get a foot onto the property ladder.
What are the changes?
The focus of APRA’s changes announced in March 2017 is for lenders to limit interest-only lending to 30 per cent of all new residential lending.
Within this new limit, lenders are also required to:
• reduce volume of interest-only lending at loan-to-value ratios (LVRs) above 80 per cent (that is if you’re borrowing more than 80% of the value of the property)
• restrict instances of interest-only lending at an LVR above 90 per cent
• remain below the previously advised benchmark of 10 per cent growth
• review and ensure that serviceability metrics, including interest rate and net income buffers, are set at appropriate levels for current conditions
• continue to restrain lending growth in higher risk segments of the portfolio such as high loan-to-income loans, high LVR loans, and loans for very long terms.
So what does it all mean for you?
In announcing the new measures, APRA Chairman Wayne Byres noted that “lending on interest-only terms represents nearly 40 per cent of the stock of residential mortgage lending – a share that is quite high by international and historical standards.”
In response to APRA’s requirements, banks and other lenders have changed their requirements around investor lending, potentially making it more challenging for would-be investors to secure finance.
If you’re an existing investor
Unless you’re currently on a fixed-rate with your investment loan, you can probably expect a slight increase in interest rates in line with APRA’s requests to lenders.
If you’re looking to add to your portfolio, you can expect to be challenged by tougher serviceability requirements, but as long as you have good equity and strong incomes, lenders are still willing to provide finance.
Multi-property portfolio investors looking to release equity could be more challenged. While prevailing interest-only rates are around 4.5–5%p.a., some lenders are likely to assess your ability to service loans on the entire portfolio at a higher interest rate (in the order of 7.5%p.a.) with principal and interest repayments. The requirements could make it very difficult for some investors looking to refinance to continue growing their portfolios.
If you’re a new investor
With the latest requirements, there could be more hoops to jump through if you’re looking to borrow to invest. But that doesn’t mean it’s impossible.
Here’s a few things to keep in mind.
1) New serviceability requirements
With most lenders tightening lending requirements, you should expect greater scrutiny of your ability to service or repay your loan. APRA’s requirements have seen most lenders standardise and increase minimum benchmarks when assessing loan affordability. For many investors, this could mean that your borrowing capacity is reduced.
2) Not what you’re paying now but what you may have to pay
While in the past, lenders might have assessed your existing (and future) debts by looking at your actual repayments with a small buffer on top, now you can expect that most lenders will be looking for a much greater capacity.
Instead of assessing your ability to meet interest-only repayments, lenders are likely to assess your ability to meet both interest and principle repayments. What’s more, they are likely to figure in significantly higher interest rates.
3) Don’t count on all your rental income either
If you’re relying on rental income to drive your property portfolio forward, keep in mind that many lenders are also reducing the amount they will consider in assessing serviceability.
You should expect that many lenders may only consider 80% or even less of rental income while others have also removed or restricted negative gearing concessions from their calculations.
4) Location and property type could matter
While every lender has their own approach to investment lending, the type of property you’re looking at and its location could also affect your ability to get the finance you’re after. Some lenders may baulk at residential unit developments while others may have preferred postcodes. Others, still, may be looking more favourably on commercial investments rather than residential or require less security.
5) Expect to pay more
In addition to scaling back on interest-only investment loans, most lenders have already increased investment loans to rates higher than standard home loans. And don’t expect lenders to be making special offers or offering discounted rates any time soon.
In the first half of 2017, many lenders lifted the interest rates by as much as 40 basis points, which follows similar adjustments in 2014 and 2015 from APRA’s initial requests for limits on investment lending.
6) Where to next?
APRA’s measures designed to moderate housing prices by tightening investment lending are likely to keep evolving in response to market conditions. “APRA will continue to observe conditions in the residential mortgage lending market, and may adjust the above measures, or implement additional ones, should circumstances warrant it,” the government authority said.
The Commonwealth Bank recently announced a freeze on lending to investors looking to switch banks and refinance their mortgage. Other banks and lenders are likely to follow with similar restrictions.
7) Invest in the right home loan advice
Securing an investment home loan can be challenging, as you may have to navigate your way through more stringent requirements, but if you can meet those requirements, there is still opportunity to be found.
Your local Aussie broker can be a valuable ally in securing investment finance and understanding the bigger picture, as they know the new APRA requirements. So if you’re thinking of investing, invest some time talking to an experienced Broker first.