If you’re a seasoned property investor or considering getting your foot into the market, you may soon be paying a lot more for a home loan if the government has anything to do with it.
The government is worried about the property market
For some time now the RBA has raised serious concerns about the current growth of Australian house prices.
In order to curb this trend and keep house prices at sustainable levels, the APRA is proposing to introduce new lending policies that could see property investors:
- Paying a higher interest rate for investment loans
- Prevented from borrowing more than 90% of the property value (LVR)
- Prevented from offsetting any losses through negative gearing
APRA stated that higher risk ratings for investor home loans may well come into effect by the end of the year.
Why is the government targeting property investors?
RBA assistant governor Malcolm Edey recently told the federal government’s inquiry into affordable housing that there was growing concern about increasing speculative activity and growing investor borrowing.
According to RP Data, property investors currently make up around 50 per cent of new housing loan approvals and this has distorted the property market.
The problem is that not all property markets are “hot” right now, with two of the biggest investor markets focused solely on Sydney and Melbourne.
The proportion of investor loans to new housing loan approvals is getting close to 60 per cent in Sydney alone and the current median Sydney house price sitting at $811, 837 (Australian Property Monitors, June quarter 2014 report).
It’s because of this that APRA has suggested a targeted approach to the proposed lending policy changes.
Could negative gearing benefits be scrapped?
Luci Ellis, head of the Financial Stability Department at the RBA, told the committee on affordable housing that the proposed changes were not being introduced in an attempt to”kill” the investor market but simply to mitigate risk. One of the proposals that is being debated is the removal of negative gearing.
If the government were to abolish negative gearing completely, there would be many investors who wouldn’t be able to pay their mortgages.
Along with a proposed higher interest rate for investment home loans, a change like this could see investors pass on these extra costs to tenants by increasing rent.
Home Loan Experts managing director Otto Dargan said it’s more likely that the scrapping of negative gearing will only apply to new investment properties while existing property investors will continue to reap the tax benefits (i.e. negative gearing may be “grandfathered”).
“So what it effectively means for new property investors is that if the costs of holding your investment property and depreciation are higher than the income you receive, you won’t get a tax deduction for that loss each year,” he said.
“We don’t know if or when this change could occur but we’re seeing a lot of investors buying now to make sure that they don’t miss out.”
Apply for an investment home loan! Call 1300 889 743 or complete our free assessment form to discuss your investment strategy with one of our senior mortgage brokers today.
Why the cost of investment loans may rise
The exponential growth of Australian house prices has been the catalyst for APRA’s proposed changes and much of this growth has been driven by:
- The current low interest rate environment
- Overseas investors
- Growing acceptance of renting over buying
“In the past, banks used to charge a higher interest rate for investment loans but over time competition caused them to drop their rates in line with home loans,” Otto said.
“Based on discussions and proposals that APRA has put forward, we could see the market move the other way and interest rates increase for investment loans.”
Otto said a change like this could potentially affect existing property investors and new investors.
“We’d expect interest rates to be 0.1% to 0.4% higher for investors but you can potentially protect yourself against interest rate fluctuations by comparing fixed rate loans and locking in your rate now,” he added.
Will you need a bigger deposit to invest?
Since a number of banks stopped capitalising LMI for more than 95% of investment loans, you already need to cover a significant amount in upfront costs as part of your deposit.
“Other lenders stopped doing interest only periods if you borrow over 90% and we think some lenders will try to mitigate their risk even further by lending a maximum of 90% LVR for investment loans,” Otto said.
Did you know that some lenders will allow you to borrow 95% of the purchase price of your new investment property? You can even borrow the cost of mortgage insurance as well.
What does this mean for Australia?
With such a large change being proposed for lenders, it can affect the wider housing market and economy in ways that are hard to predict.
“We believe that grandfathering negative gearing could see the cost of rent to increase over time and cause a crisis in several years when there are less rental properties to go around,” Otto said.
Increasing the size of a deposit needed for investment properties (capping the LVR at 90%) works well from a funding and risk point of view so it’s something that the banks and APRA may favour.
“However, this move will lock out first time investors which can cause the gap between the haves and the have nots to widen over time,” Otto said.
He added that compared to countries like the United States, Australia is well placed in that respect so it would be a shame if Australia went down this path.
Despite these concerns, the aim of the proposed changes is designed to rein in house prices so it’s likely that home buyers may stand to benefit.
In addition, investors may not be too badly affected since any proposed higher risk rating for investment loans will need to be significant in order to spur any considerable slowdown in property investing.
Can you afford to buy an investment property?
Buying an investment property is relatively easy at the moment thanks to the combination of low interest rates, negative gearing and the ability to use the equity in your home rather than saving a deposit.
You can work out if you can afford an investment property using our investment property calculator.
Alternatively, call us today on 1300 889 743 or complete our free assessment form and discover if you qualify for an investment loan.