2016-02-06 Ch-Ch-Ch-Changes! The 2016 Post-APRA Investing World

On his classic 1972 track ‘Changes’; the late David Bowie, one of my favourite musicians of all time; crooned the line ‘Turn and face the strange’. In the world of Australian property investment; aspiring investors are faced with somewhat of a game-changer. And it is indeed strange.

Since the introduction of stricter lending rules via intervention from APRA (Australian Macro Prudential Authority); banks have been mandated to reduce their growth of consumer mortgages for residential investment loans – to 10%. This is quite far from the lofty levels that (for example) the big-4 banks had experienced over the period of late 2013 – late 2015.

2016 is upon us and would-be investors now need to navigate changing times in the world of borrowing. Pretty important stuff, because after all, what good is it doing all your research and due diligence on investment properties, if no lenders will provide you the loan you need – at a deposit and loan-to-value ratio that you can afford!

So what are the post-APRA world changes that have come down the pipe so far, and how may these impact your property investment objectives for 2016?

Here is a short list of some of the changes that have taken place, and considerations to have in light of them, moving into 2016:

Restricting maximum LVR (loan to value ratio) allowance for ‘investment’ category mortgages:

Where in previous years investors could source mortgages that required as little as 0% initial depost (though these were very rare since the 2008-9 GFC); most investors could quite easily access mortage products that required as little as 5% deposit, or perhaps 10% deposit.

Fast forward to today and most investors will be hard-stumped to find banking lenders that can offer , 90/10 LVR ratio loans anymore. Most are now only offering 80/20 LVR loans as a starting point. Some non-bank lenders can circumvent the rules and continue to offer 90/10 LVR loan products. However, these institutions are getting rarer and harder to source loans from.

This means investors who had saved their 10% deposit (I.e. let’s say $40,000 of a $400,000 purchase-price investment property); now have to cough up another 10% deposit, meaning they need to find $80K, not $40K, to buy the same property! Many first-time and younger investors simply won’t have access to that kind of starting capital. The knock-on effect of this ruling is less first-time investors entering the market.

This of course pleases APRA as it helps banks balance their books more towards that 10% growth cap for investor mortgage products; if less people are actually applying for bank loans as a result.

Part and parcel with this has been some lenders refusing to allow LMI (Lender’s Mortgage Insurance) as a capitalised cost on to loans at those higher (say, 90/10) LVR ratios.

Removal of discounted interest rate package deals for their mortgage products:

Again, for investor-only mortgages (many lenders have retained discounts for owner-occupied, or PPOR – Principal place of residence – loan products); there is now a premium added to interest rates offered by some lenders for investor products. The investors then need to factor in this increased interest cost into their overall  holding costs for any given property.

In turn, this has made some investors more aggressively seek properties that offer greater rental returns to compensate for the increased holding costs.

Tougher repayment calculation rules for investor mortgages

In light of further interest rate cuts from the RBA in recent months; some lenders have not actually reduced their ‘calculation of repayment capability’ for mortgage applicants accordingly. What this means is, let’s say when interest rates were 0.50 basis points higher, several months ago, and lenders were calculating an applicant’s serviceability based on a scenario where interest rates spiraled to say, 7% (they run these calculations as standard for all applicants); typically when RBA rates drop by 0.50 basis points; so too should the lender’s serviceability calculation assumptions (I.e. their calculation should be using a rate of say 6.50%, not 7%). However, lenders in recent months have maintained say that 7% figure in that calculation.

These changes have substantial implications for property investors: 

1) The reduced LVR allowance by lenders means borrowers need to cough up more initial deposit. Say you wanted to borrow to buy a $300K investment property. Some lenders at 90/10 LVR acceptance would only require your $30K (10%) deposit, plus purchase costs. A drop to 80/20 means borrowers need to find another $30K to make up a $60K deposit.

2) Removal of discounted interest rates also is a deterrent to first-time investors entering the market, as their interest repayments will now be slightly higher than what home owners pay. There could thus be a cooling of investors being active in many markets throughout Australia.

3) For investors who remain active or don’t perceive the above two changes to inhibit their ambitions; they’ll continue with their property investment purchases. However, they simply won’t be allowed to borrow as much. If banks are calculating serviceability based on a higher ‘worst case scenario’ forecast; the banks won’t lend as much. To some investors, this could be the difference between being allowed to buy a $500K investment property, to now only perhaps $320K – $350K. If this eventuates, this will be a game-changer in the market as it’ll wipe a lot of the Sydney and Melbourne potential investor buyers out (who can play in the Sydney and Melbourne markets with >$350K, these days) and into lower-median markets such as Brisbane, Adelaide, Hobart, and some regional centers.

Investors are facing a time of change in stricter lending rules following APRA’s intervention. Couple this with a modest outlook for at least 2016 by most economists and investment commentators; and investment property is in for an interesting year. Here is a story from the AFR that goes into deeper detail on APRA changes and knock-on effects for property sectors.

However, wise investors who are capable of still borrowing; understand that gloomy outlooks and stricter rules that cut others out of the market; can create opportunities for them. In this way, I still believe 2016 will be a year of opportunity for investors. You’ll just need to dig deeper to find the deals and prospects that will further your goals, than ever before.

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