With above average incomes, education and asset positions, you would expect that property investors would be classed as low risk borrowers to the banks. In fact, most of them need bigger loans!
Yes, it’s true. Investors are higher risk borrowers.
The good news is that banks still want to lend money to investors.
The bad news is that in the coming years many property investors will have their plans limited by their bank, unless they make some simple changes to their situation…
You’d pay your home loan first
Let’s say that you get into financial trouble. Would you make your home loan repayment or your investment loan payment?
I’ve got no doubt as to what most people would do. When they get into financial strife they continue to find a way to pay any loans secured on their home while letting other debts go into arrears.
Investors take risks
By its very nature investing is risky and, in some cases, property investors speculate in unstable markets to seek a higher return.
Remember, the banks don’t make money when the property goes up in value! They make money from you making your repayments on time.
Investment loans have interest only repayments
This may seem a bit strange. I mean, if you take longer to pay off your loan then the bank earns more in interest right?
That is true but their cost of funds also increases which means their margin on your loan gets squeezed. If too much of their loan book has interest only repayments then they can be in real trouble when they borrow on the money market. The government also requires that they set aside more capital.
The banks want you to reduce your loan to reduce their risk. Once you owe below 80% of the property value they are less concerned about their risk and more concerned with how quickly you are paying it off!
This is the main reason why some lenders don’t offer interest only repayments for 95% home loans.
Are you relying on negative gearing?
Your tax bill will be reduced if your property is negatively geared and some lenders will take this into account when they assess your borrowing power.
Let’s think about this in more detail though: you only receive your negative gearing tax refund when you lodge your tax return. You don’t receive it each month unless you lodge a request to vary your PAYG tax withholdings which few investors do.
So if you are heavily reliant on negative gearing then you may have a cashflow problem until you receive your tax refund.
How good is your tenant?
I’m sure you do a great job of looking after your home but how are your tenants treating the place?
If a bank needs to sell your property then they want the property to be presentable and in good condition. Maybe the reason that they need to sell your property is because your tenant trashed your investment property and didn’t pay the rent. You get my point.
Banks need to balance their loan books
Different lenders have different exposures to investment loans. For instance, St George Bank has around 30% of its loan book as investment loans while their big brother, Westpac, sits at around 80%, at time of writing this blog.
Banks don’t like their loan portfolio to be skewed too much with one type of home loan. Having a high proportion of interest only investment loans can be a real problem for the banks as it increases their cost of funds.
Do you need an investment loan?
Our mortgage brokers are experts in lending to property investors. We know which banks are eager to lend and which ones are more conservative or expensive.
Call our mortgage brokers on 1300 889 743 or fill in our free assessment form to find out how we can help.