With further changes to investment lending by APRA at the end of March, it’s even more important to use your mortgage broker to make sure your lending strategy stands the test of time and you can continue to hold and build wealth through property.
Going back to December 2014, APRA outlined a range of measures to be complied with by ADI’s (Authorised Deposit Taking Institutions – banks). These included a cap on new residential investment lending to 10% growth pa and minimum interest rates for assessment purposes to ensure borrowers capacity to repay their monthly mortgage. APRA have said they expect that interest rate to be at least 2% above the loan product rate with a minimum of at least 7%. ASIC also acted bringing in the non ADI’s to kerb the growth of investor lending.
Among other things, with the GDP sitting under 2% and not getting to the 2%-3% range which would justify a rate increase by the RBA, on 31 March 2017 APRA sent a letter to all ADI’s to immediately take steps to also address interest only residential mortgage lending which currently represents 40% of lending by ADI’s. APRA have now restricted that lending to 30% and within that, strictly limited interest only lending above 80% of the loan to property value ratio. They will also be further monitoring lending at high loan to income ratios, lending at high LVR’s, long interest only periods and loan terms. So there will be more changes to come. APRA’s concern is the environment over the last few years including according to their letter “high housing prices, high and rising household indebtedness, subdued household income growth, historically low interest rates and strong competitive pressures.” The RBA in their April 2017 cash rate decision also noted growth in household borrowing outpacing household income and that supervisory measure should help address that. So, ASIC, APRA and the RBA have come together to put additional measures in place to slow down lending in the investment property market.
To highlight the impact of these changes, for an investor with lending of $1m and interest only repayments at 4.7% over 30 years, they would currently be paying $47,000 pa in repayments. When their interest only term expires assuming the same interest rate, they would be put onto principle and interest repayments of around $62,000 pa and the investor would need to find an additional $15,000 pa to pay the mortgage from net income.
APRA have also requested ADI’s to reassess interest only loans when they expire where the borrower applies for a further interest only period. So it isn’t as easy to phone up your lender and extend your interest only repayment period and the restriction on interest only doesn’t just apply to investors … it includes owner occupier loans. This isn’t to say you cannot get interest only repayments extended but you will now need to show you can service the loan at principle and interest repayments and some lenders have this week put this into practice already. Not all lenders are the same and there are options including refinancing to another lender if needed.
If you’re an investor, keep informed and surround yourself with the right people all the way along the property wealth chain that considers your personal financial situation. From sourcing your property portfolio with the right yield and capital growth potential, putting in place the right finance with the right lender and getting tax advice on managing your portfolio.
If you have an interest only loan that will be ending soon, safeguard your portfolio and start planning with your broker now so you are ready for the next cycle and can continue to hold and build future wealth through property.