You may have noticed in the press lately – certain headings like “all the Banks need to tighten their strings” and “there is a massive bubble in the Australian market” …… well what does this mean for you?
As an owner occupier and buying your first home or upgrading – not too much has changed as far as the bank criteria in getting finance for a property. You are still going to need a 5% deposit plus costs to move on a purchase but investment purchases are a different story – as all the major changes have been around investment borrowing.
The Australian Prudential Regulation Authority (APRA) oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, private health insurance, friendly societies and most members of the superannuation industry. APRA is funded largely by the industries that it supervises. It was established on 1 July 1998. The regulator has been putting pressure on the banks to slow down investment spending on housing especially in Sydney and Melbourne where the capital growth has been 16.2% for Sydney and 10.2% for Melbourne in the 2014/15 tax year. See great article below.
APRA has been putting suggested regulations to the banks to slow this investment spending down, so what effect does this have for you? As an investor the biggest change is the need for greater deposits to invest in properties – usually 10% of the purchase prices plus costs. One bank has made it clear and only lending 80% to investor borrowers in New South Wales. The second thing is that the interest rates for investing above the 80% lend are now typically higher than owner occupied borrowing and the banks are doing no specials on these, you pay the carded rate and that is it.
The other major change across the board is how the banks are now servicing your loan. They have always had benchmark rates i.e. the rate that they use to service your repayments at – this varies from about 7% to 8% at the minimum. So if interest rates go up you can still afford to make the payments when the rates are at 7%. The big change now is that if you have existing loans with other banks they are taking into account these payments with their benchmark rate (which I have no problem with) however if it is investment debt and you are paying interest only payments, they banks are now servicing that debt at principle and interest payments over 25 years or the balance of the loan. Now I have no problem with the owner occupied debt being calculated this way but if you are a professional investor then you would have most of your investment loans interest only and focusing on paying down the owner occupied debt if any.
You ask yourself “what does this mean?” If I’m a professional investor with $1mil of lending at the current rate of 5%, the interest only payments for the year would be $50,000. Now if we use the banks bench mark rate of 7.5% the repayments would be $75,000. The banks are now servicing this at 7.5% on a 25 year term principle and interest so the payments per year are now $88,668 that is an extra $13,668 of income needed per year to service the same loan with the bank’s new lending criteria.
It is importing to talk to a good Property Strategist and Broker, if you would like more information on this and what is happening in the current banking sector drop me a line at firstname.lastname@example.org or leave a message and we will come back to you ASAP.
Blog post by Chris Pullen from Blue Wave Property Strategies