Lenders clamp down on investor loans
Property investors across Australia are facing tougher lending tests as the nation’s banking regulator moves to moves to rein in the booming Sydney market.
The Sydney property market had a strong start to 2015 as annualised house-price growth rebounded in the March quarter.
While extremely high, Sydney’s annualised growth rate of 12.4% in late 2014 had actually been slowing before increasing again to 13.9% at the end of the recent March quarter.
The rebound in annualised growth rates in Sydney can partly be attributed to the Reserve Bank of Australia’s (RBA) decision to cut the official cash rate to 2.25% in February.
Another cut, which was announced in May and reduced rates to just 2%, is likely to continue to spur property investor appetite, particularly in Sydney where there has been a large amount of investor activity.
Conscious of reining in an overheated property market, the finance lending regulator, the Australian Prudential Regulation Authority, has required that lenders apply tougher lending standards, specifically for investors.
This will apply across the board for all Australian property investors. Even if you’re a property investor living in Perth and wanting to purchase an investment property in Perth, you’ll still have to meet these stricter lending standards.
So what do these stricter standards include?
Most lenders have begun utilising more conservative figures when evaluating loan and refinancing applications, which in turn have reduced the borrowing capacity of some investors.
Lenders are also increasing their buffers, which test how applicants would cope with repayments when interest rates rise.
Some lenders have increased these buffers from about 180 basis points (1.8%) to 200 basis points (2%) or more.
For example, an investor applying for a loan with an interest rate of 5% would now have to prove they could make repayments if interest rates increase to 7%, rather than 6.8%.
Finally, lenders have also withdrawn discount offers and incentives for investor loans and are applying much more stringent loan-to-value ratios (LVR).
Bankwest, for example, has changed its LVR for investor loans from as much as 98% to just 80%, which means investors will require far bigger cash deposits or equity interests in their existing properties.
Because of these tougher lending standards, it’s important for property investors to engage mortgage brokers who specialise in investment finance to ensure finance and investment options are optimised.