WATCH: Home Loan Experts managing director Otto Dargan speaks with Your Money about investment loans, interest rates and borrowing for your SMSF.  

Rates are lower but investment lending is still tight

The Australian Prudential Regulation Authority (APRA) removed the cap on investment lending so competition is heating up. Investment loan rates are lower than they have been in previous months but the subsequent hand down of the Royal Commission means lending policies are still strict, especially among the major banks. Banks are mainly concerned about protecting their brand in light of increased regulatory oversight from the competition watchdog. Non-bank lenders tend to be a little more considered so they are now a more viable option if you’ve been knocked back by a major bank.

Should you fix or switch to variable?

First of all, no one can predict the future. However, with 3-year fixed rates currently as low as 3.49%, fixing is definitely worth considering if you’re not planning on moving or selling in the near future.

Improving your chances at approval

• Most banks still prefer principal and interest (P&I) home loans over interest only, although the removal of the IO speed limit means more lenders are willing to consider this.
• Banks are applying tougher criteria to investment loans compared to home loans which means that lender choice is critical.
• The assessment of living expenses is still at fever pitch so reducing your spending at least 3-6 months before applying for a mortgage can really improve your chances.
• It’s an oldie but most lenders prefer borrowers who have at least a 20% deposit in genuine savings.

Are SMSF loans back in favour?

If you’re at that age where you’re considering your retirement nest egg, you may be wondering where to turn for a loan for self-managed superannuation fund (SMSF). The big lenders in this space were Macquarie, AMP and St George but they have pulled out. NAB is still technically playing in SMSF lending but you need at least $5 million in your fund so they aren’t a viable option for most borrowers. Why did these banks pull out? As with investment loans, lenders offering SMSF loans came under regulatory pressure in the lead up to the Royal Commission. So protecting brand reputation is essential for these major lenders.

SMSF rates will increase

Some non-bank lenders are in fierece competition with each other vying for SMSF borrowers but the problem is that it creates an environment for mortgage prisoners. With less lenders to choose from, borrowers who have an SMSF loan will likely have no choice but to stay with their lender and pay a higher interest rate.

What type of SMSF borrowers are likely to benefit?

• Business owners who have a commercial property as their premises and are planning to sell to their SMSF for tax purposes.
• High net worth individuals with at least $500,000 in their SMSF.

When it doesn’t work… If, for example, you have $200,000 in your SMSF, the cost of running the fund plus the cost of the SMSF loan will likely outweigh, or at least eat heavily into, any potential return on investment.

The tide has turned for second-tier lenders

When you talk to people about their perception of the banks, most people say they would rather support a smaller lender. However, most customers will still choose a major bank over a smaller lender, even if the smaller lender is offering a much sharper interest rate. Much of this psychology has to do with the old adage of “too big to fail” and a misguided belief in the instability of second-tier lenders. Our mortgage brokers deal with many lenders on a daily basis and we would challenge this belief. We find that smaller lenders are very sophisticated in the way they do business, their rates are often lower, and their online platforms are very innovative, making it easier for borrowers to manage their home loans. Credit unions and building societies, in particular, take really good care of their customers.

Do you qualify for a home loan?

Lending policies and interest rates have changed a lot over the past few months as banks react to regulatory changes and take a closer look at their loan books. However, a mortgage broker can help you cut through the noise and find a lender that can offer you the right home loan for your needs and at a sharp rate. Call us on 1300 889 743 or complete our online enquiry form to discover if we can get you approved for a mortgage.