How can you deal with tighter lending regulations after APRA’s intervention?
Following the Australian Prudential Regulation Authority’s (APRA) demand to curb investor lending to below 10%, lenders have pulled the pin and made borrowing more difficult for Australian investors.
So as an investor, how does this affect you and how can you cope with these new regulations?
The financial regulator of deposit-taking institutions, APRA, has tightened the regulations surrounding investor credit which has made it more difficult and expensive for investors to get their hands on a loan.
Industry experts forecast that these new policies are here to stay, at least into the foreseeable future or until APRA is satisfied with the rate of investor borrowing. This means investors need to be savvy when they go about getting finance within the now highly-regulated market.
Why has APRA cracked down on investor credit?
With an alarming 12.4% increase in investor loans over the past 12 months, and investor credit up 10.4%, APRA has stepped in and prompted lenders to rewind, or slow, the rate at which they’re handing out cash to investors.
Regulators are concerned that record-low interest rates will drive up property prices even further, so the macroprudential regulations are designed to foster low-interest rates while simultaneously keeping a lid on the property market.
New lending rules
The reality is that APRA’s policies now make it more difficult for investors to obtain finance from a deposit-taking institution in the current marketplace.
Here are just some of the ways that obtaining a loan will now be more difficult, as lenders make you bend over backwards;
More difficult to service a loan
Tighter servicing models with further stress-testing.
Changes to borrowing capacity assessments as lenders have reduced the proportion of rental income they consider when estimating serviceability, which is now 60%, down from 80%.
Lower loan-to-value ratio (LVR)
Many banks are now lending less in relation to the property price. For instance, Bankwest is currently allowing investor loans to have a maximum of 80% LVR, compared to their previous maximum LVR of 95%.
Rates on investor loans are no longer subject to special discounts which effectively means borrowing becomes more expensive as you’ll have to contend with ‘standard’ rates. For example, ANZ is no longer offering discounts to investors.
More difficult to get cash out or loan top-ups
Banks are now requesting evidence of the purpose of a ‘cash out’ or loan top-up, and some lenders are only allowing ‘cash out’ to be used for new dwellings or major renovation projects.
How to deal with the tighter lending?
With significant changes to investor credit policies, you need to know how to manage these new conditions so it doesn’t impact your ability to access finance.
Keep in mind that APRA is the regulatory body of deposit-lending institutions so lender’s that don’t take deposits, will not fall under their authority. So when comparing investor loans, make sure you look beyond the major financial institutions and consider niche lenders that may have more accommodating lending criteria.
If you have a small deposit or you're nearing a lender’s maximum borrowing capacity, you should get your loan pre-approved by the lender before they commit to a transaction. This will give you an upper hand when application time comes around.
Try to lower the amount you need to borrow by getting together a larger deposit for your loan. This can be achieved through disciplined savings, or by reviewing your current portfolio to see how you can leverage your existing assets. For example, you may be able to access some equity from a current property.
Get an updated valuation of your property
Given the current market, it’s likely that your existing property portfolio has increased in value. It could be worth getting your property professionally appraised to show your lender that you have a larger asset base and thus you’re a low-risk borrower. If you’ve borrowed at a higher LVR, you could be able to restructure the loan with the same amount as a result of a new valuation.
Boost your rental income
If you’re borrowing capacity is tight, consider increasing your rental income through renovations, charging higher rents or even adding a granny flat to your property. This will help your cash flow and thus increase your serviceability potential in the eyes of the lender.