Why is it suddenly harder to get an investor loan in Australia?
How lenders have responded to APRA's clamp down and what you should do if you're an investor.
If you’re in the market for an investment property, chances are you’ve observed the air-tight regulations for investor loans recently. Since the Australian Prudential Regulation Authority’s (APRA) request for investor credit to remain below 10 percent of the total amount lent, lenders are making you jump through more hoops just to qualify.
With strict regulations in full swing, how do you go about getting approved for an investor loan despite the changed rules?
Find out why APRA has urged deposit-taking institutions to slow the pace of investor credit and what you can do to get one step ahead.
Why have lenders cracked down?
With a staggering 12.4 per cent jump in investor loans over the past 12 months, and investor credit up 10.4 per cent, APRA has stepped in and prompted lenders to curb the rate of investor property lending through what it calls "macroprudential policy".
By keeping investor credit below 10 per cent of total loans, it’s hoped that the financial regulator will help put a lid on the heated property market.
These new policies will, potentially, stabilise property prices as investors won’t be able to access finance as easily, and they won’t be able to compete as aggressively with owner-occupiers. In turn, this will provide the Reserve Bank with leverage to maintain a lower cash rate.
As a result of the change, many Australian lenders have reviewed their lending criteria and serviceability models, and are no longer providing additional discounts above and beyond the standard discount rate. In turn, this has made it more difficult, and costly, for investors to take out a loan for investment purposes.
How have lenders changed their lending criteria?
The extent to which lenders have altered their lending and serviceability criteria varies, however the table below illustrates the changes implemented by some major Australian lenders;
Below are some of the latest APRA-related changes from the big four and other lenders:
What core changes have been made to the rules?
- Stricter borrowing capacity assessments: Lenders have implemented changes to borrowing capacity reviews. In particular, they’ve reduced the amount of rental income they factor in when estimating your serviceability potential down to 60%, compared to 80% before.
- Lower loan-to-value ratio (LVR): Lenders are now offering less credit to investors in relation to property price. For example, Bankwest is allowing investor loans to have a maximum LVR of 80%, compared to its previous LVR of 95% for investors.
- Less discounts: Rates for investor loans are no longer subject to unique discounts, which ultimately means that accessing finance becomes more expensive as there are fewer ‘special’ offers. For example, ANZ is no longer offering discounts to their investor customers.
What’s an investor to do?
APRA’s new policies govern all deposit-taking institutions, which means it will be more difficult for you to access finance for an investment property.
However, here are some ways that you can optimise your chance of being approved for investor credit.
- Compare smaller lenders: Although APRA is the regulatory body for deposit-taking institutions, there are many niche lenders in the market that don’t fall under its governance. When comparing investor loans, look further than the ‘Big 4’ or the major financial institutions, and consider smaller lenders, such as building societies, that may have less strict serviceability and borrowing requirements.
- Larger deposit: Try to boost your deposit for your investment loan through disciplined savings or by reviewing your current assets. Lenders will be more inclined to approve your application if you’re considered a low-risk borrower, and need to borrow less.
- Increase your rental income: It may be possible to boost your rental income by undertaking a renovation or charging higher rent to reflect the current market conditions, to increase your serviceability potential.
- Build up and borrow against equity: If you own existing property, you should work towards increasing your equity so you can potentially borrow against this equity and refinance with a new investment loan.
What type of investor loans should I compare?
With fewer incentives and stricter loan limits, you’ll be required to come up with a larger deposit and you’ll need to supply full documentation that shows your ability to cope with interest rate rises, as well as your ability to service your mortgage.
It’s therefore vital that you compare investor loans side-by-side to find a lender that may provide more accommodating criteria, given the current market.