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Banks put brakes on investor lending – Michael Yardney

 

It’s getting harder and harder for serious property investors to get finance to purchase more properties.

To remove some of the heat from the housing markets over the last eighteen months our banks, under instructions from A.P.R.A., have been putting the brakes on lending to property investors by raising their interest rates and implementing tougher lending criteria. bank reserve interest rate save money finance loan

Anyone who’s been investing for a while will know that real estate investing is really a game of finance, and when you can’t get more finance you can’t grow your property portfolio.

That’s because to create wealth through property, strategic investors continue to borrow money to buy more investment grade properties using the equity in their existing properties for their next deposit and the cash flow from their rents to service their debt.

In the past, when assessing your borrowing capacity different lenders looked at your serviceability very differently.

Some were more flexible than others ..they assessed the loan to value ratios they were prepared to lend at differently, the percentage of your rental income available to service loans differently and they would stress test your ability to repay loans differently.

But now all this has changed and investors with significant property portfolios are finding it much harder to get more finance from all our major banks 

You see…to assess your serviceability, rather than using the actual rate you’re paying on your current loans, banks now “stress test” your ability to repay loans at a higher interest rate.

This is fair enough, they’ve always done this to some extent.

But recently the few banks that took a “more realistic” approach to serviceability have stepped in line with the other lending institutions.

It seems that all banks are using interest rates of 7.4% to 8% to stress test your current loans, and then ensuring that you can make the higher repayments required for a principal and interest loan –  even if you’ve taken out an interest only loan.

And this is where the problem lies for serious investors….

As your property portfolio grows, so do your repayment commitments. Seeing through piggy bank

And the more loans you have, the harder these stricter lending criteria will affect you and the sooner you will hit your maximum borrowing capacity.

Now don’t get me wrong …

I’m not against the regulators curbing investor lending as this will lead to a sounder banking system and less volatile property markets.

However, these latest changes will have a disproportionately higher impact on property investors with a large portfolio and make it significantly harder to get more funds.

Other ways the banks are making it harder:

To make things even more difficult for investors who want to get more finance, some lenders have:

  1. Removed the special discount they gave for investor loans which are now more expensive than owner occupier loans. piggy bank save mortgage house property gold loan deposit
  2. Reduced the proportion of rental income they take into account when calculating serviceability.
  3. No longer allow for the negative gearing effect in their servicing calculations.
  4. Reduced their Loan to Value ratios in some suburbs or for certain types of properties (like off the plan) meaning investors will need a bigger deposit.
  5. Made it more difficult to get “cash out” or “top up” your loan by refinancing an existing loan. They now ask for evidence of what the funds will be used for, preferring them to be used for renovating existing properties or buying further properties.

And it gets even worse for the wealthy …

The Australian Financial Review reports that the ANZ Bank is tightening the screws on wealthy property buyers with new assessments on how much they can afford, demands for more detailed information of existing loans and confidential internal reviews.

Dozens of the nation’s blue-chip postcodes are being targeted for automatic reviews by the bank’s Property Risk division that can over-rule assessments and demand tougher deals, such as bigger deposits.

I guess this is because when the real estate markets eventually turn, properties at the prestige end of the market tends to be amongst the first to get hit and likely to fall in value significantly.

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Source: Australian Financial Review

Yes, times are getting tougher for property investors – we’re going through a credit squeeze.

In fact, I haven’t seen finance as difficult to obtain for a long, long time.

But if A.P.RA.’s intervention helps smooth out the property cycle by slowing down our booms and minimizing the risk of a significant downturn, that’s good for us as property investors.

Stay ahead of the game

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