Q: I’ve been reading that banks are cutting back on lending to investors. I had been thinking about buying my first investment property, but now I’m not so sure! What’s actually going on and how will it impact me?
A: Partly off the back of the thriving Sydney and Melbourne property markets but also the growing levels of investor activity around the country, Australian banking regulator, APRA, has cracked down on lenders in an attempt to reign in investor lending growth.
Lending to investors has been growing at a much higher and faster rate than any of the other major categories of credit. Over the 12 months to March, investor lending grew at 20.9% for the year compared to owner occupied growth of 3.3%.
In an effort to reduce this growth to more sustainable levels, APRA has set new limits and expectations on lenders, and one of the biggest is to cap the growth in investment lending to 10% for each of Australia’s Approved Deposit Institutions (ADIs). Most major lenders in the country are ADIs, but this does exclude some of the smaller players, like Pepper and Liberty who are on the Aussie panel.
APRA has also told lenders that it wants to see sound residential mortgage lending practices and it will be scrutinising higher risk lending and affordability.
In response there are several things that lenders are doing to meet this 10% growth cap that will impact property investors, including:
1. Less money available for investors to borrow
ADI lenders are restricted to 10% growth in investor lending each year, which basically limits the pool of funding available to all property investors. Once it’s gone, it’s gone, so lenders will be stricter on releasing this money to borrowers.
2. Tightened serviceability and affordability measures
Lenders will have tougher serviceability criteria, which includes things like interest rate buffers of at least 2% above your loan’s interest rate AND higher ‘floor lending rates’ which have been set at a minimum of 7% – meaning you now need to show you can afford repayments at in interest rate of 7% even if your loan’s interest rate is only 4.5%. This applies to owner occupiers as well as investors.
3. Reduced discounts on interest rates for investors
We’re in a highly competitive mortgage market and many lenders are offering reductions off their advertised interest rates to get customers to sign on the dotted line. These discounts are being wound back for investors though.
4. Different advertised interest rates for investors
Over recent years interest rates have largely been the same for borrowers, whether you’re an investor or an owner occupier. Now, lenders are introducing what’s called ‘differential interest rates’ for new investor loans meaning you’ll now be paying more interest on your investor loan than an owner occupier will pay on their loan.
5. Lower loan to value (LVR) ratios
Many lenders are reducing their loan to value ratio minimums to 80%, or even lower. This means that you need a bigger deposit of 20% or more to get a loan for your investment property.
This may sound like a lot of changes, and they aren’t minimal by any stretch of the imagination, but these restrictions aren’t in place to stop investor lending altogether. They’re designed to ensure there’s sustainable growth in investor home lending over the long term.
These changes also aren’t expected to impact too much on existing investors, and are unlikely to impact investors with an application approved formally but not yet settled, but primarily new or first time investors. My concern is the unintended impact these restrictions will have on first home buyers who want to buy an investment property as their first home, instead of something they can live in.
Overall, the changes don’t stop you from taking out an investment loan, but you do just need to be aware of the likelihood to need a bigger deposit, higher serviceability, etc.
I’d recommend getting formal home loan pre-approval before making an offer on any property, which you can get direct through your bank, another lender or a mortgage broker.
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