How CommBank is cracking down on loans for new homes
Planning to buy a newly-built home to live in or as an investment? Commonwealth Bank is about to make that process a little trickier -- but ultimately that's a good thing for borrowers.
The Australian Financial Review reports this morning (August 10) that CommBank is soon going to change the process it uses for assessing land values when developers are building new estates.
Developers often begin marketing new home sites to potential investors well before basic works on their site, such as the installation of roads and sewage, have begun. However, according to a confidential presentation cited by the AFR, the bank will soon begin deferring any loans for investors hoping to build on those sites until after all those basic preliminary works have been completed and a proper valuation can be made based on a physical inspection of the completed basic site. Right now, loans can be approved based on a preliminary valuation which might not involve a site inspection at all.
That change creates a potential dilemma for developers, since many of them rely on the funds from pre-selling home sites to actually pay for the preliminary works. The AFR estimates that many developers rely on pre-selling up to 50% of lots. If investors can't access those loans, developers will need to borrow much more money themselves to cover the preliminary works.
In recent weeks, we've also seen a change of rules for how investment loans are assessed by all banks. While it might seem that getting a loan is becoming much tougher, this change could actually be beneficial to many investors.
If you take out an investment loan based on the perceived land value of the property but a subsequent valuation suggests that that the land is not actually worth that amount, that's going to make it difficult to realise the value of your investment. In the best case, it will take longer for the value of the property to rise to a level where you can make a profitable exit; in the worst case you'll end up out of pocket.
CommBank hasn't yet confirmed the policy officially, and we'll have to wait and see if that approach is adopted more widely -- but Australia's "Big Four" banks do typically march in lockstep on these issues. We'll keep you updated on any new developments.