By John McGrath
Most lending institutions have recently tightened their lending criteria for investors, making it a bit harder to get loans for those wishing to begin, or grow, a property investment portfolio.
This has happened because the banking regulator, the Australian Prudential Regulation Authority (APRA), is concerned that investment lending is too high and this is helping to drive the Sydney property market.
Latest statistics from AFG, Australia’s largest mortgage broker, imply that the change in lending criteria might already be having an effect, with investment activity on a national scale moderating from 43.1% of loans in April to 40.9% in May.
Alan Hemmings, general manager of McGrath’s mortgage broking division, Oxygen Home Loans, says lenders have changed their lending criteria for investors in a number of ways.
Changes to investment lending criteria:
- Most lenders have reduced discounts on investment loans; some have also reduced the discounts on interest only loans.
- Some have limited their acceptable Loan to Value ratios (LVR) for investors to 90% of the purchase price. One lender has reduced it to 80% for properties in Sydney.
- Some have increased the buffer they add to interest rates to assess serviceability. They are now typically adding 2.25% to 2.75% to the standard variable rate
- Lenders always look at the existing debts the client has and the repayments liable. On credit cards, one lender has increased the standard repayment of 2% of the limit to 3%.
- Some lenders previously used the existing interest rate when calculating repayments on existing debts but now they are adding a buffer. On interest only loans, some lenders are now calculating repayments based on principal and interest instead.
Tips for improving your borrowing capacity or making sure you can get the loan
- The good news is that all lenders are still lending to investors. The most effective way to reduce your LVR (Loan to Value ratio) is to save for a larger deposit. If you already have a property, make sure you are building the equity up (by principal and interest repayments) to release this cash to help fund the next purchase. A third option is using a parent’s property; a couple of lenders allow 20% of the purchase property to be secured by a parent’s property.
- Finally, it’s important to understand the valuation process and how to minimise the risk of a valuation coming in low and jeopardising your loan application. There are lenders that will determine the value by using the Contract of Sale, use these lenders and you lessen the risk of paying LMI or having the loan declined due to a low valuation.
- To improve your serviceability: Repay all debts on time; Reduce the limit on your credit cards (if your limit is $10,000, the banks will use this figure even if you only use a portion of this every month); and choose a lender that will use interest only repayments on existing debts or principal and interest without adding a buffer.
- Use a broker. They know all the ins and outs of how every lending institution on their panel works, as well as the specific changes each one has made for investors. Brokers will look at your circumstances and determine which lenders are likely to lend to you and which ones will not. Why go it alone? You could end up wasting a lot of your own time applying for finance with a range of lenders who would have previously approved you but now won’t. It’s worth remembering that having several loan rejections on your credit history can be damaging too .
Alan’s advice to investors: “Don’t let the changes in lending criteria influence your decision to invest. As always, make sure you are buying the investment property for the right reason. Work with your broker to get an understanding of the capital growth, the rental yield and finally how much the property will cost you. As with any investment, the advice of a trusted advisor is important.”