2017 Spotlight on lender changes and how they affect you
There have been significant changes that have occurred in the lending landscape since Dec 2015 and this can affect their portfolio building plans.
At Investors Choice Mortgages we have been on the front foot in anticipating these changes by interpreting the Australian Prudential Regulation Authority (APRA), the body that governs the banks, comments and working out how we can help our clients.
For instance in early March APRA announced that it would like lenders to reassess every loan if there is any significant changes. We don’t know how this will be interpreted but what it could mean is that a simple request to extend the interest-only period of a loan for another 5 years may trigger a whole new application, and with lending practices getting tighter and tighter this could be a risk. Especially if investors are concentrating on paying down their home loans and directing all their spare cash to that loan. If all of a sudden their investment loans became principal and interest it could create some unplanned cashflow issues.
If you would like to have your lending situation reviewed don't hesitate to complete the contact form which will link you directly into our diary so you can book a time to discuss. Click on the contact form to the left of this article or here to take action today.
I know the changes are creating a lot of confusion. Currently, in our private Facebook group there has been some discussion about lending issues, dissatisfaction with banks and in some cases people about to refinance without knowing they are moving maybe to a lower rate but one that will completely stifle their future borrowing plans.
So let me bring you up to speed with what has happened in the last year, what you might be able to do about it yourself now and in the future and in the future I want to share with you some of the things I am working on (some a bit out of the box) to help our mortgage clients to continue building long-term wealth with property.
So the changes so far:
- The announcement by APRA at the end of 2015 that lenders needed to reduce their level of lending a percentage of all their lending to investors to below 10%. For some, this meant they left the investor market completely for a period of time ie AMP, for others it has been slower.
This means: you maybe with a lender or want to refinance to a lender who no longer will accept your refinance. Or they may do so at a lower loan to value ratio restricting your planned ability to tap equity in the future or who refuses to take investment loans as in the case of CBA last week. In addition banks cost of funds has also gone up and they are putting rates up outside any RBA announcements. This percentage is about to be reduced again so you want to make sure you are with a lender who won’t restrict your future plans.
- APRA also announced that lenders should compete on products alone not on how they assess the difference in someone’s borrowing capacity. This means that essentially that there is very little difference between lenders on how much you can borrow. There are still lenders that will take your actual current interest rates repayments but for the majority of lenders this means any actual repayments you make are buffered up to a P&I repayment over the remaining term of your loan and at least at a 7.24%pa rate.
This means: you may not even be able to borrow the loans you currently have with the new servicing rules. If you have plans to borrow in the future ie release a bit of equity for a pool, car, holiday, wedding, deposit for the kids home, deposit for an investment property etc then things could get tougher in the future so do something now and see if it is possible for you to tap some equity before all the lenders follow suit. In addition lenders have now also increased the nominal rate of your living expenses based on what you earn. So it doesn’t matter if you are a brilliant saver and budgeter a mandatory figure based on what you earn will be applied to the servicing calculator.
- Lenders have reduced LVR’s ie increased the deposit you need for an investment property.
This means: No longer will a 5% deposit cut it, in most instances, you will be expected to have at least a 10% deposit or in the case of CBA announcement this week 12% deposit for your next purchase or refinance. This will also restrict your ability to refinance to a new lender and possibly access equity. You need to have a considered approach to the lenders and their policies before signing any applications. There is definitely the possibility that LVR’s will reduce further possibly to 80% or lower for investors. Adelaide Bank has already restricted investors lending to 80% loan to value ratios ie you need a 20% deposit to buy.
- Lenders are protecting themselves and excluding lending to specific certain postcodes This is not just mining towns but often in areas where there is a lot of units being built, ie Melbourne and Brisbane CBD.
What this means: Have you bought off the plan? You may find that you not only can’t get the loan you initially thought you could and have to find a lot more cash to settle your property but many lenders will not lend to postcode you are buying in. You need to work out a plan B or alternate lender sooner rather than later.
- As mentioned above APRA announced in March that they are considering that if there is any significant changes to an initial loan terms or conditions then the borrowers need a complete re-assessment of their borrowing ability to maintain that loan.
This means: We have interrupted that as when your 5 year interest only period expires no longer can you just request a 5 year extension you will need to requalify. With tighter servicing for some this may not be possible and it could affect their cashflow plans. Anticipating this change we have contacted all our clients with Westpac and CBA, who do currently have an automatic rollover, and processed many IO extension requests for those who it was appropriate for and assisted buffering them from this possible change.
- APRA announced on the 31st March that they want lenders to have under 30% of their loans to be interest only. Currently, CBA and ANZ are sitting at over 38%. This announcement covers both investment lending and owner occupied lending. In fact, home owners will find it even harder to have an IO loan.
This means: you may have to move to another lender to get an interest only loan. Some lenders, with more lenient servicing calculators are charging extra interest fees for investment and interest only loans. For instance, an extra 0.35%pa for investors and 0.2%pa for IO loans and, in some cases, lenders are also putting on a 'Professional Investor' interest rate buffer. Although this seems absurd if you own a home and 2 investment properties you are considered a 'professional investor' and you have to pay an additional 0.75%pa. The price you pay for an investment, IO loan if you own 3 properties is 1.3%pa extra in interest.
Is IO better than P&I? Let's look at the big picture, if this new rate of 5.54%pa Interest Only is applied to a $500,000 loan, the monthly repayment is $2539pm, if we take a standard Big 4 Bank investment loan at 4.73%pa then at the P&I repayment they may require you to have the repayment is $2862pm. As you can see paying a higher interest rate actual means you have more in your pocket at the end of the day, so I believe investors will be strategic about the opportunity to work with lenders that allow them to continue to grow their portfolio rather than just look at rates and be pressured into loan features they don't want ie P&I repayments.
An Aside: There has been some speculation, by the media recently, that mortgage brokers recommend IO loans for investments based on their own commissions. I do find this offensive to the majority of brokers who couldn't even tell you what commission they earn from each lender as they are committed to optimising their client's objectives, not their own. However, if you are speaking to a broker ask them why they are suggesting an interest only loan for you and make sure they can answer you with how it serves you to do so.
There are many many more changes that have come through, and each lender has their own unique way of processing these ‘requests’ from APRA. I have covered the ones I have seen that have directly affect my clients the most.
If you feel you could benefit from talking with us at Investors Choice and working with a proactive mortgage broking company dedicated to providing not just finance but a all round service offering which including, education, reports, software, professional team introductions and discounts, deal reviews of properties you are buying, then please take action now and make a time to talk to a member of our team.
At Investors Choice Mortgages we do things a bit differently, this probably doesn't surprise you. When considering your financial needs we use all our experience of working and developing portfolios with investors for over 12 years. We look at the long-term plans for our clients and we earn commission for this. However we offer more, we are dedicated to working on growing a sustainable portfolio with you and hence we give our clients an option of working with us under two different service offerings. Each provides you with resources to assist you build your own property success including education, access to Residex reports, RPData Professional software access, Monthly group coaching calls, discounts and introductions to a team of independent professionals including buyers agents, property inspectors, rental managers and many more plus I personally will conduct property reviews for you using all the tools available to me once you have a pre-approval.
Essentially all the things I wished I had to support my finance and purchase decisions when I started my property portfolio. We are geared up to assist you every step of the way.
You can book a time to talk to us directly to see if we can assist you. I hope this has assisted you and I will report soon on some new opportunities we are working on to assist investors to continue to grow and improve their portfolio.
As always here is to your property success.
So please click here now for a confidential and complimentary finance review.