If you’ve been in the market for a home loan over the past few years, with the goal of investing in property, you will not doubt have seen APRA’s name pop up numerous times in various capacities. The Australian Prudential Regulation Authority (APRA) has been closely monitoring the Australian property market (as it should) and implementing various changes to lending guidelines in an attempt to curtail growth that has happened too fast and too soon, particularly across the Eastern seaboard. The changes are also a response to ongoing concerns about high levels of household debt, contrasted against slow income growth.
The most recent changes that have been announced, link back to a restriction put in place by APRA in 2014. This was over concerns that low interest rates would create a property price bubble, so APRA issued strong advice to banks that annual investor lending growth should remain under 10 per cent, or there would be consequences. Just a short time later in June 2015, it became clear their strategy had not worked, as figures released showed investor housing debt had increased by 12.4 per cent up to March of that same year.
This led to APRA’s plan B, which was to restrict the amount of interest only loans being issued for residential mortgages. This was announced in early 2017 and a 30 per cent cap was put in place on new mortgage lending. Interest only loans are considered more high risk than standard mortgages and around the time of APRA’s announcement last March, rates were peaking at almost 40 per cent of all residential mortgages. Lenders were quick to respond, with many announcing changes in February that would be implemented in the months ahead.
Where does that leave us today? Well the most recent development is that APRA has rolled back the restrictions put in place in 2014 , with the 10 per cent annual cap being removed. This is mostly in recognition of a shift in lender attitudes and practices, with standards improving and growth starting to stabilise as a direct result. There is however still a need for APRA to monitor lender activity to ensure consideration is given to just how much a borrower can realistically afford and that lending is managed in more conservative ways than has been done in the past.
So how will this play out in the property market? In general, borrowers will be expected to provide a larger deposit to secure finance and their expenses will be more diligently assessed. “How can we get them on board?” has now (finally) become “can they really afford this?”. A tough reality for potential buyers to face, but ultimately a great disciplinary measure in the long term, against what has been fairly roguish behaviour by lenders in the past. The flip side of this of course is that there will be less competition overall in the market, allowing property prices to ease off, providing better investment opportunities to those buyers that can secure finance.
The more prudential approach to lending may make it difficult for those investing in property for the first time, to get their foot in the door. Lenders are trying to be on their best behaviour, even more so now as the Banking Royal Commission sends shock waves through the industry. Regardless of how diligently they budgeted to save for a deposit, first home buyers may now lose out, simply because their expenses look too risky on paper. Those with existing investor loans may also feel the pinch, with interest rate increases on their loans and more stringent financial testing restricting opportunities to build their property investment portfolios.
It may seem difficult to work out how to navigate through this period but there are some basics to keep in mind that will help you on your way. First of all, don’t underestimate the value of investing in a good mortgage broker. Their expertise and advice will be particularly beneficial right now and could make or break your chance to secure finance. Secondly, go over your finances again, with a fine-tooth comb. The more padding you can allow in your budget the better you will look. Lenders will not only consider your capacity to service the loan today, but also how you will manage in the long term, considering potentially high interest rates and your capacity to pay principal as well as interest. Presenting them with a strong case and clear long-term projections that show your viability as a borrower will instil confidence and fortify your borrowing power. Thirdly – do your research and try to anticipate what they think might be the best possible investment scenario for you, rather than only what you want. Rental income no longer has the pull that it used to, with many lenders minimising its impact on the overall investment and some lenders are even showing bias towards location and type of property, based on preferred postcodes and dwelling styles. It’s a brave new world out there people, that hopefully will pay off for all of us in the long run, but we still have some bumpy roads to navigate until then.