In mid 2015 we highlighted through this Blog that Banks were tightening credit policy in regards to investment lending and that had resulted in tightening of lending criteria.
This was initially due to communications from APRA to all Approved Deposit-taking Institutions (ADI’s) about expectations of a range of measures to reinforce sound residential mortgage lending practices. An ADI is basically a bank, credit union or building society. APRA’s expectation was that ADI’s maintain growth in investment lending portfolios to below 10%. Those communications quickly lead to Bank’s:
– Reducing Loan to Valuation Ratios (LVR’s) on investment lending
– Increasing interest rates on Investment Loans
– Increasing serviceability buffers & reducing investors borrowing power
The above steps did have the desired effect of keeping a cap on investment lending, but in recent times the regulator has noted that investment borrowings have begun to accelerate again.
In March 2017 APRA wrote to all ADI’s advising that it viewed that “further steps to address risks that continue to build within the mortgage lending market are appropriate”.
A key factor imposed was to limit the level of new Interest Only lending that ADI’s were undertaking, and an expectation that ADI’s begin to self impose internal limits and closely monitor Interest Only lending at higher LVR’s. There was also an expectation that serviceability metrics, such as interest rate and net income buffers, were reviewed.
The letter highlighted that it was expected that ADI’s would immediately take steps to address several mortgage lending issues identified in the letter.
What does this mean to property investors?
A lot of property investors have historically utilised a strategy of taking out interest only investment loans to maximise tax deductible debt, while utilising any surplus income to reduce non tax deductible debt (i.e. their owner occupied home loan).
This is viewed as a perfectly sound strategy by many advisers. However the regulators clearly have concerns that in the current national environment, which includes low interest rates, rising household debt and higher house prices, that some interest only borrowing may not be appropriate.
The Banks have reacted quickly, as expected by the regulators. Investment Interest Rates have again experienced a further out of cycle interest rate increase and this increase is even more substantial for Interest Only loans. In many cases fixed loan interest rates now have a very significant premium for investors and those seeking Interest Only repayments.
Credit policies have also been further tightened, reducing the availability of lending at higher LVR’s and in many cases reducing the borrowing power of investors.
If you are looking to purchase an investment property, but have not reviewed your borrowing capacity or loan costs in recent times, I would suggest you again enquire with your Lender or Mortgage Broker.
If you are an existing borrower with variable rate investment loans, chances are you have already experienced increases in interest rates, or will experience those increases shortly.
If you are currently in a fixed interest rate term, you have avoided the immediate increases, but need to be aware of, and start planning for, the potential increase in rates and repayments at the expiry of your fixed rate.
If you have Interest Only borrowings you also need to consider that your lender may not be willing to extend your Interest Only term beyond the current expiry date, imposing Principal and Interest repayments that will impact your household cashflow. Many borrowers need to start planning for that increased higher repayment now.
There are options
The positive news is that borrowers still do have options. While most ADi’s have tightened borrowing controls and interest rates for investors, they have done so at different levels depending on their current loan portfolio.
It is also noted that not all lenders are ADI’s that are monitored by APRA, and while these lenders might be maintaining prudent lending standards, their interest rates and terms have not been impacted to the same level.
So in the current environment if you are not happy with your investment loan you simply need to dedicate the time to shop around and find a more suitable lender for your needs.
With the widespread changes this could take some time so the other option is to consult your local Mortgage Broker who deals with a broad number of lenders and can do the researching for you!