Why banks are cracking down on investors and what you can do
Investment lending may be tightening, but options still abound.
In 2014, the Australian Prudential Regulation Authority, or APRA, decided to put the brakes on investor lending. As property prices skyrocketed and investment lending made up a bigger and bigger slice of the home loan pie, the regulator decided it was time to cool the market down.
The regulator put a 10% limit on growth in investor lending, hoping this would take some of the heat out of the housing market. The cap doesn’t seem to have done much, as investor loans now make up 40% of the market.
Why banks are cracking down
APRA has expressed its concern to Australian banks. They seem to have taken the message on board, with numerous lenders lifting rates on investors and putting new restrictions in place. Commonwealth Bank and Bankwest announced they would no longer offer new investor home loans through the mortgage broker channel, while AMP said it would halt accepting new investor refinancing customers.
The changes appear to be a proactive move by banks to stave off further regulatory intervention. APRA chairman Wayne Byres told an economic conference that, while there were no plans to further restrict the regulator’s 10% cap, lenders knew to stay in line or risk further APRA action.
"At least for the time being, the benchmarks that we communicated – including the 10% benchmark for annual growth in investor lending – remain in place and lenders that choose to operate beyond these benchmarks are under no illusions that supervisory intervention is a possible consequence," Byres said, according to SBS.
While there is some debate among global regulators about whether or not investment home loans are inherently riskier, APRA said it targeted the segment because of its accelerated growth.
“We highlighted investor lending because it was an area that we observed accelerating credit growth and very strong competition, a combination in which the temptation to compete and protect market share could well drive a weakening of standards,” Byres told a group of economists at a 2015 business luncheon.
"By moderating growth aspirations, we are reducing the tendency for lenders to whittle away lending standards in the name of matching competitors, because inevitably, when it comes to lower standards, it's the other guy's fault.”
What you can do
While many lenders may be clamping down on investors, there are still steps you can take to better position yourself if you’re looking for an investment loan.
Save a bigger deposit
Some lenders have restricted the loan-to-value ratio (LVR) available to investment customers. This means you might need to save a larger deposit to see your loan approved.
Consider P&I payments
Interest only payments are a common strategy employed by investors. By only paying the interest portion of a home loan, investors can keep their monthly repayment to a minimum. The idea is to later sell the property for a capital gain. The problem with interest only payments is that they don’t reduce the principal, or original amount borrowed. This can be a real risk should a property decline in value, and some lenders are beginning to tighten their rules around interest only repayments. If you want to increase your chances of approval, consider making principal and interest repayments instead.
Look at the alternatives
While many lenders are tightening their investor offerings, others still have very competitive deals for investors. Non-bank lenders are in a unique position to appeal to investors, as they are not regulated by APRA and aren’t bound to the 10% lending cap. Compare investment loans below to see what’s on offer.