The new world of investment lending
Over the last few months, there is some economists made small comments which are ambiguous. Even though we have now hit 6 months of no economic growth, there is no one saying we are in a recession. The definition of a recession is a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.
Since Australia being in a great place, our interest rates are not considered as low, even though we are experiencing the lowest interest rates we have ever experienced. Low interest rate is a signal of a slow economy, with the low interest rates being a way to stimulate the economy. Also, there is the 'Trump Factor' appears. Is it good or bad, it is still an 'unknown' at the moment.
We have seen several lenders increase their fixed rates for the last 6 weeks, the 5 year fixed interest rate has increased by as much as 0.6%.
Also with this, several lenders have interested the investment loan interest rates between 0.08%-0.25%, which is outside any RBA meeting.
I think that either the banks are trying to gain margin back on their landing or they are seeing troubled waters ahead, it's a little bit of both.
Along with this, lending policies for investors are changed by some lenders. Policy changes include;
- As a minimum, the loan repayments are serviced at 7.25%, there is always a buffer regardless of the current rate paid.
You can see how it gets tight very quickly, if you add that to a portfolio of properties, at principal and interest plus reduced rental income.
- 60%- 75% of the actual rent recieved is the amount of the rental income used for servicing.
- Servicing is calculated on a principal and interest loan term, but not the interest only repayment. (yet this was an old policy)
- Negative gearing to service a borrowers ability to repay the loan is being removed
For some postcodes, the only way to borrow to buy in that area is you have to be able to service the debt without rent, which means they will only lend to borrower with a higher income for servicing. Lenders are simply not using renal income at all to service the debt.
The lenders would be either over exposed in certain suburbs or are trying to reduce their lending to investors. There is no doubt that the lending policies have been affected by the APRA, and we will continue to see the effects in the following months.
Even though it sounds negative, I see this as a positive instead.
The Sydney and Melbourne property markets that are primarily investor focused come to a halt, because there is a lot of the markets in the higher priced suburbs, the yileds are already too slow, the tightened lending only makes it near impossible for it to keep growing.
These changes affect the investors more than the home owners, or even owner occupied borrowers. When the RBA increases rates themselves, tightening of home owner markets will be impacted.
So what investors can do to combat the interest rates as well as capitalize on new markets that will start to present themselves?
- It might be worth switching to Principal and interest to save some money. Interest only loans with some lenders attract a higher rate than those principal and interest loans.
- Fixed rate loans- locking in might be the idea
- Switch lenders- if the lender can see the loan as a lower risk, they might offer a better interest rate
- Talk to us, it might even be worth while tapping into equity now while the market is good.
For what opportunities may come down the track, I want to keep my options open, but I don't want to put all the eggs in one basket........