It could soon be tougher than ever to invest in property as Australian banks move to keep up with new regulatory changes aimed at pulling back on investment loans .
So far, one major bank is no longer accepting 100% of your rental income when assessing your ability to repay the home loan.
Other changes to take effect include increasing the buffer or factored interest rate when assessing how an investor would cope if interest rates were to increase and scrapping some incentives and discounts.
Is this the end of investment loans? Not at all but there are some changes that you should be aware of if you’re considering getting a home loan to invest.
What are these policy changes?
Rental income and negative gearing.
Previously, one major lender used 100% of your rental income when assessing your ability to pay off a home loan. This policy has now been scrapped and the percentage of rental income that the lender will now accept will be based on property type:
- Residential (80%).
- Commercial (65%).
- Serviced Apartment (50%).
As a result of the policy change to rental income, this same lender will now accept negative gearing as part of its serviceability assessment (your ability to pay back the mortgage).
Factored interest rate.
One major bank is now assessing investors at a higher factored interest rate, from 6.8 per cent to 7.1 per cent. The increase to this buffer basically means that your borrowing power could be affected.
For example, Jimmy has a gross income of $80,000 a year and wants to buy an investment property in Parramatta valued at $300,000.
He has an existing property in Lidcombe valued at $300,000 with a $240,000 mortgage.
Using the equity in his existing Lidcombe property, he has enough to cover the 10% deposit ($30,000) required to purchase the Parramatta property.
He pays $900 a month in mortgage repayments and earns $280 a week in rent from his Lidcombe property. He has no other existing debts.
With the old buffer rate, Jimmy would pass serviceability with around $106 to spare each month.
Under the new factored interest rate, Jimmy would need an extra $1052 per month plus just to prove to the bank that he can afford to pay off the new loan.
Cashback and discounts.
One major bank will no longer offer a cashback offer for investment loans and will also reduce its discount offer.
It’s hard to say whether other major lenders will follow suit with these changes in the coming
six months. Some may wait until APRA actually announce capital requirement changes.
Why are these policy changes being introduced?
A recent report from Moody’s found that “Australia’s housing market risks are skewed towards the downside” and “rising house prices are intensifying imbalances in the housing market.”
Basically, the Australian Prudential Regulation Authority (APRA) – the big government agency that regulates the bank – is worried about a property market crash and it reckons the huge growth in property prices over the past few years has been the result of crazy property investor activity.
Because of this, it wants financial institutions, like banks, to cap investor loan growth to below 10 per cent per annum which translates to a slow down in the number of investment loans they approve.
The regulator will also soon be increasing the capital requirements for investment loans making it more expensive for banks to fund these types of loans compared to owner-occupied loans.
So far, the regulator has talked about this but has not actually made a change to capital requirements for investment loans.
Despite this, some major banks have already moved to introduce policy changes that may hinder investors’ ability to borrow.
Will non-ADIs be making similar policy changes?
So far, there have been no policy changes to serviceability or pricing for investment loans with non-authorised deposit-taking institutions (non-ADIs), such as merchant banks and finance companies.
There is the potential for investors to avoid these policy restrictions with these finance providers but you have to keep in mind that these companies are often funded by banks in one way or another so there is the potential for APRA to have some influence on them.
Will the policy changes curb foreign investment?
These changes will likely have little effect on foreign investors, who are more affected by the exchange rate and the country in which they earn their income.
Foreign investors also tend to have large deposits so requiring them to have a bigger down payments will likely not have much of an effect.
As it stands, one major lender has restricted foreign investors to borrowing 70% of the property value, down from 80%. No other major lenders have made such an announcement.
Can I still get a loan to buy an investment property?
Despite new capital requirements and policy changes, it’s still possible for property investors to get approved for a competitive home loan.
It comes down to choosing the right lender and having sufficient equity and a good deposit.
Our specialist mortgage brokers understand investment loan policy so why not give them a call on 1300 889 743 or complete our free assessment form to find out how we can help you.