imprudent-investment-lending

Investing,Mortgages & Loans,Personal Finance

Want to invest in property? Watch out for these lending changes

1 Jul , 2015  

Rebecca Jarrett-Dalton

Rebecca Jarrett-Dalton

Credit Adviser at Two Red Shoes
She doesn't wear a suit but she owns fabulous shoes. It shows as she is the owner of 'Two Red Shoes' a premier mortgage broking firm servicing greater Sydney. Not a typical name for a mortgage broking firm as she wants you to know you are dealing with a different kind of mortgage broker.
Rebecca Jarrett-Dalton

Right now there are huge changes in investment lending, and, I believe it’s a knee jerk overreaction. Massive. Ridiculous. An under considered impediment to would be investors and home owners – that’s right, home owners as well as investors. My opinion only but I stand by it.

Full disclosure. I do not have a degree in economics and neither am I paid hundreds of thousands of dollars to consult to the government on economic policy; I do have what I think of as a coal face education on this topic – working in the industry for 14 years and seeing the actual market reaction on a day to day basis.

Right now I am facing a deluge of new information to absorb with lenders changing pricing for investor loans, restricting the percentage of a homes value that we can potentially borrow, and even introducing state based changes to each of the above. This only bolsters my belief that you have almost no chance of being approved for a loan by walking in the door of your local bank – how on earth will you know what is particular to that lender that you wouldn’t face next door?

Lets look at the motivation – the changes come about in an effort to:

 

Curb imprudent lending, three ways:

 

 a) Looking at interest rates and building in protection for borrowers in the event of interest rates rising

We already do this and have always done so! Current average interest rates are sitting at around 4.5% pa (ignore the advertised standard variable rates, almost no one is paying those, reality is closer to 4.5%). And yet when banks test your affordability they ALL add a buffer to allow for rate rises. The understanding I have from training is that buffered interest rates are intended to make sure you can afford your loan now and for the next 4 years – after which time the world is a different place financially; the kids are grown, the car is paid off, you’ve had some wage growth and rents have risen, this last one is a certainty.

Further, buffered interest rates are typically 3-4% above the current rate. Most lenders have a policy of testing based on a floor rate of whichever is the HIGHER of your current rate plus 1.5% or 8%. Affordability is being tested at as high as 8% pa already, nothing imprudent here. That’s not far under GFC conditions so one could argue that if the whole world were to come crashing down we could still afford our loans. The reality is current economic conditions are fragile, unemployment is gently rising, we’re very much more likely to continue to enjoy low interest rates for a continued period. And we can afford our repayments.

 

b) Looking at interest only repayments and affordability ongoing

The change which will have the biggest impact is this one right here – lenders are now testing your affordability based on making principle and interest repayments, on all of your loans, over an average loan term of 25 years (taking out the 5 years you might have as interest only). This will have a significant impact on the amount that borrowers can qualify for, and specifically it will hit those with multiple properties, what we might call our sophisticated investors who are naturally the most suitable to actually invest. And lets not forget there’s both a need for investment property and a drive to have Australians contribute to their financial future. Its counter intuitive to make this harder for us to do.

Yes eventually you have to pay the loan off, but we’re talking about the future again where conditions are different to where you are today.

 

c) Looking more closely at what we call LVR’s – Loan to value rations, that percentage of the value of the home you’re allowed to borrow.

This one will be the biggest pain for me, just on a personal note – keeping on top of who will lend what percentage & where. But never mind.

Lenders have reacted by limiting the amount you can borrow for investment purpose and in cases this is even restricted state by state. Yet you can; as a home buyer with very little savings, borrow the maximum for your own home and the repayments are all yours – no rent to assist, no tax benefit.

Its important to note in all of this that these changes impact on those who need to borrow to invest – it has no impact at all on cashed up foreign investors or even Australians who don’t need to borrow – furthering the wealth gap & perpetuating a cycle of property owners and property –never –will – owners.

 

Protect against the perceived “bubble” most particularly in Sydney and Melbourne.

The underlying condition that everyone is ignoring here is the law of supply and demand. Prices cannot inflate if people are not able / willing / forced into paying them. But above all, able. If there is no one to buy that property the price is irrelevant. Where there are more buyers than sellers the prices rise. And particularly so in Sydney – because this is where people want to live!

The rationale is that prices are out of hand because we’re borrowing ridiculous amounts of money and the sky will fall and no one will be able to make their repayments. We know that prudent lending has actually always been in place so repayments aren’t an issue – and as to the sky falling, this implies a whole load of home owners will no longer want their properties and we will be flooded with stock and no buyers to be found.

Taking a longer term view the average price growth is actually only in line with inflation – it’s only that the increase in price has happened very quickly after a longer period of stagnation, why? Lets look at positive migration figures, growth in single parent families and birth rates and work out if this is more of a driver than “speculation” or imprudent lending.

Protecting our first home buyers (here’s where the effect comes in for our home owners)

The rationale is that if we have fewer investors, if prices moderate, our first home buyers will be more able to buy their dream home.

Undoing this logic is the need for all first home buyers buying an established home to have at least 5% deposit and another 4 – 5% up their sleeve for stamp duty and legal fees. If you consider that the average first home buyers established home is at least $500,000 that’s $50,000 they need to save, minimum, all while paying $500 a week in rent. How’s that going to happen?

There are ways around this, help from parents or building a new home with exemptions from stamp duty and a grant to assist with costs – but new builds these days cost more than established homes on average, so we hit affordability hurdles again, the repayments themselves are not affordable on the higher loan amount.

And more pressure on rents because of investors leaving the market is not going to help. Where will you rent if there are no investors, and what rent shall you be paying?

If the government is truly serious about helping first home buyers they need to consider returning the benefits to those buying established properties as their first home.

The final sting in the tail – price growth has already moderated. Job done.

This happened naturally in the first quarter of 2015 and is being reflected in data coming out of some of the major lenders as well as colloquial observations – real estate agents are now returning your call, auction clearance rates are down, you have time to look at properties and consider your offer which you just didn’t have in 2014. Prices have not necessarily dropped but the urgency has eased and growth at that hurly burly rate is no longer a factor.

Funny thing how markets moderate themselves based on natural laws rather that requiring regulators interventions. There’s a lesson there.

I guess if there’s one overriding lesson it is that now more than ever you cannot attempt to do this alone. You have almost n0 chance of finding the right lender by yourself, so use the (usually almost always) free service of a professional and save your sanity.

So give your broker a ring, today! Click below, it is that easy!

 

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