Banks put brakes on investor lending

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. 

[Imported] WP Advertize it Free Strategy ad 10 July 2014 (Desktop #44800)

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….18540769 - piggy bank and house on bowls of scales. isolated over white

As your property portfolio grows, so do your repayment commitments.

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.

ANZnew

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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Michael is a director of Metropole Property Strategists who create wealth for their clients through independent, unbiased property advice and advocacy. He's been once agin been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


'Banks put brakes on investor lending' have 4 comments

  1. November 25, 2016 @ 11:42 am Martin

    That’s an interesting article Michael and I find myself in exactly that situation. What is the answer to getting mor finance?

    Reply

  2. November 25, 2016 @ 2:52 pm Glenn

    Property Investment in Australia has become a zero-sum-game with little or no benefit on planning to gain wealth through property investment. The more properties you have the harder you are hit. If you have 5,6,8 or 9 properties and you wonderful Interest only loans start to expire from their 3/5/10 year time frame, (as recommended by most experts) banks will no longer allow you to maintain interest only and force you into P&I loans, no will they allow you to access accumulated equity. The result of this is devastating to your serviceability and any future plans for living on “rental income”. Suddenly your positive cash flow portfolio has become a ball and chain with no way out but to sell up and pay massive capital gains tax. So 15 years in with all the hard work, contracts, renovations, developments and the accompanying stress and risks, you are left stuck having to work 2 jobs or more well beyond your hopes of early retirement just to service double loan repayments without any possible recovery mechanism but to sell and take a hit.
    Thinking of buying an investment property, think again if you are over 40. This is how our Government wants to treat anyone with half a financial brain who actually attempts to care for of their own financial future and not become another welfare leech. Perhaps that is actually what this country needs, more people dependent on handouts from our super smart politicians.

    Reply

    • November 25, 2016 @ 3:08 pm Michael Yardney

      Yes Glen it’s harder to get finance today, but this is short term. I’ve invested through 2 severe credit squeezes before. This too shall pass

      Reply


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