With its strong property market, Australia has always been a popular choice for property investors. However, some recent regulatory changes have made things a little more difficult. This article examines the APRA’s recent changes and what they mean for investors.
Those looking to prepare for their retirements often turn to property investment. One of the most stable types of investment, property has historically led to great returns. In fact, Australia’s house prices have risen consistently over the last 50 years. This makes property investment even more appealing.However, there is an issue that such wide-scale investment creates. Many argue that increased investment means less housing stock for residential buyers. Some also argue that investors drive up property prices, thus making it difficult for first-time buyers to get on the property ladder. The Australian Prudential Regulation Authority (APRA) appears to agree with this viewpoint. In March 2017, they implemented new guidelines that directly affect property investors. This article examines what those new measures are. Moreover, it looks at the effect they’ll have on current and future property investors.
Who Are the APRA?
Established in 1998, the APRA oversees a range of Australian financial institutions. These include:
- General, health, and life insurance companies
- Building societies
- Credit unions
- Many organisations within the superannuation industry
A prudential regulator, it creates the rules that these institutions must abide by. Moreover, it’s primarily funded by the very institutions that it regulates.Its main role is to essentially ensure that such institutions deliver on their promises to customers. However, it also compiles statistics for the Australian industry at large.In many cases, the regulations that it creates are in response to current issues. That’s what’s happened with the organisation’s March 2017 regulations. These affect any firms that lend money to homebuyers.
What Changes Has it Made?
In March 2017, the APRA created a mandate that relates to interest-only loans. These are loans that allow the borrower to only repay the interest on a home loan for a set period of time. Investors often use them to bolster their portfolios without causing cash flow issues.The APRA has determined that lenders offer too many of these loans to property investors. As a result, residential buyers find it more difficult to secure funding for their purchases.The mandate thus limits interest-only loans to a maximum of 30% of residential lending.However, the new regulations stretch further than that. The organisation also requires the following from lenders:
- Place restrictions on interest-only loans with a LVR (loan-to-value) ratio of over 90%. The LVR helps lenders to determine the true financial value of a property. They divide your loan amount by the value of the property to create your LVR. If you have an LVR of 90%, this typically means you’ve placed a 10% deposit on the property.
- A reduction in the amount of interest-only loans with LVRs of 80%.
- Each lender must review its metrics to ensure they meet the current property climate. Such metrics include their net income buffers and the interest rates that they charge.
- Restrict the amount of loans they offer for high-risk categories. Such categories include loans with high LVRs. But they also include loans to low-income borrowers and very long-term loans.
Why Has This Happened?
The APRA has identified that interest-only loans make up too large a proportion of home loans.The organisation’s chairman, Wayne Byres, goes into more detail. He says: “Lending on interest-only terms represents nearly 40 per cent of the stock of residential mortgage lending.”“
The first thing to note is that you won’t lose your current interest-only loan. Lenders must still honour the loans they approved prior to March 2017.However, your loan may change depending on its structure. Those on fixed-rate loans will continue on as normal, until the end of the fixed term.But the requirement for lenders to review their metrics may affect those with variable loans. It’s likely that you will face an increase in your monthly repayments. This is so lenders can bring their interest rates in line with the APRAs expectations. This likely won’t be a huge increase for property investors with one property. But those with large property portfolios and several variable loans may see larger effects.
What About Adding to Your Portfolio?
This is where things may get a little trickier for current investors. Many use interest-only loans to help them add to their portfolios. While this is still possible under the new regulations, you face some extra barriers.You’ll face tougher serviceability requirements. This is so lenders abide by the mandate to cut down on high-risk loans. Expect to face questioning about your income and equity whenever you apply. Investors with strength in both areas may still gain access to interest-only products. But those who present a risk may not be able to expand their portfolios using such loans for the time being.
What If You Want to Release Equity?
Current investors who want to release equity to build their portfolios face greater challenges. Lenders may see this as a sign that you don’t have a strong income to make your purchase. As a result, they may charge higher interest rates, assuming you can access a loan at all.In fact, the interest rate may increase to 7.5% per year for a principal and interest loan. These are regular home loans in which your monthly repayments cover some of the loan amount, plus interest. Getting an interest-only loan under these conditions will be even more difficult.This means that investors may need to find other methods of securing the initial financing for portfolio building.
New investors will likely find that they have to jump through more hoops to secure loans. This is particularly the case when applying for an interest-only loan. Lenders will be wary of any new investor that’s unwilling to repay the principal on their loan straight away.Here are five issues that you may run into when applying for a loan.
Issue #1 – Higher Serviceability Requirements
The APRA’s new mandates have caused lenders to tighten their belts. It all comes down to the need to take on fewer high-risk loans. This means lenders will want to feel certain that you can make your repayments as a new investor.They’ll place more focus on your ability to make repayments. This may take the form of asking for more proof of income. Lenders may also spend more time examining your documentation. Most lenders have already increased their affordability benchmarks. New investors may find that they have less borrowing power than they anticipated. It may be best to speak to a lender first before looking for an investment property.
Issue #2 – Different Payment Assessments
Previously, lenders would judge your repayment abilities based on the type of loan you took out. For interest-only loans, this meant that investors could secure more funding. This was due to the low monthly repayments required for such loans.That’s likely to change with the new regulations. Lenders will now assess your ability to repay a principal and interest loan. They’ll do this even if you’ve applied for an interest-only loan. You may also find that you have to pay higher interest rates.This creates a double-barrelled issue. Firstly, lenders will judge your borrowing capacity based on future debts. For example, they’ll assess your ability to repay after your interest-only period ends. Secondly, you’ll generally have to make higher monthly repayments than you would have before.In fact, most lenders have already scaled up interest on investor loans. You’re also less likely to access discounted rates and special features in the near future.
Issue #3 – You Can’t Rely on Rental Income
Many new investors rely on rental income to bolster their portfolios. But most lenders will place restrictions on this, based on the new guidelines.Typically, you’ll find that lenders consider no more than 80% of your rental income as income usable for repaying a new loan. Many will only accept a much lower percentage. This means that you need a suitable alternative form of income to make up the slack.Some lenders have also restricted the concessions they offer for negative gearing. But this generally affects experienced investors more than beginners.
Issue #4 – The Location and Investment Type May Matter More
Location and property type have always had an effect on home loans. But they may matter even more in the wake of the new regulations. The problem here is that each lender takes their own approach.Some lenders may not allow you to borrow for a property that’s currently in development. Others have preferences when it comes to postcodes. You may also find some lenders push you towards commercial, rather than residential, investments.The key is that you may find that the property you want doesn’t match the requirements of some lenders. As a result, you may have to widen your search for financing. Or, you’ll face more conditions to get your loan.
Issue #5 – This Isn’t Set in Stone
Even a year after the fact, many lenders are still adjusting their procedures. This means that more issues may rear their head in the coming years.Don’t make assumptions. It’s best to speak to a professional before you start applying for home loans. A mortgage broker may be able to help you find lenders that can service beginner investors.
The Final Word
The APRA’s new guidelines will affect both current and new property investors. Generally speaking, you’ll find it more difficult to secure an investment loan. Those looking to access their equity to build their portfolios face further problems. Plus, you need to be in a very stable financial position to access interest-only loans.However, it’s not impossible to secure a good loan in the current climate. You just need to know where to look.It also helps to find the right property. That’s where Cohen Handler can help. Contact our buyer’s agents today to gain access to a team that can help you secure investment property for less.