How the APRA’s Tighter Guidelines Affect Investors With Multiple Properties
The APRA has made it harder for investors to buy property in Australia. New investors find their access to interest-only loans restricted. But what are the effects on those who have property portfolios?
Experienced investors already know about the Australian Prudential Regulation Authority (APRA). It oversees most of the financial institutions that you have dealings with. Their guidelines affect the types of loans that you can take out. Moreover, they affect the criteria that lenders use to approve you for those loans.
In March 2017, the APRA made things a lot harder for investors. In particular, it made things more difficult for those trying to access interest-only loans.
Novice investors feel the biggest sting. They now need to raise a lot of money to justify access to investor loans. But what about those with established portfolios who are thinking of buying more property?
This article examines the new guidelines. It also looked at how they affect investors with established portfolios.
The New Guidelines
The main guideline that the APRA introduced asked lenders to limit the number of interest-only loans they distribute. As of March 2017, such loans can only make up 30% of the lender’s new home loans.
That’s a problem for investors. Most of them rely on interest-only loans to help them to buy property and build their portfolios. In fact, 60% of the loans used to buy investment property are interest-only loans.
As you can see, such a major limitation means that investors have to find new ways to finance their purchases.
There are also other guidelines that fall within this limit. The APRA has also encouraged lenders to do the following:
- Curb the growth of lending to investors to less than 10%. The obvious reasoning behind this is to make it easier for owner-occupiers to buy properties.
- Reduce the number of interest-only loans granted to those asking for over 80% of a property’s value. In addition to this, the APRA wants severe restrictions placed on those asking for 90% or more. Simply put, if you don’t have a good deposit, you’ll struggle to access an interest-only loan.
- The APRA has also called for blanket restrictions on high-risk loans. As investors know, interest-only loans fall under this banner. Lenders consider them to be high-risk because they have a large probability of default. Many struggle to keep up with their repayments once the interest-only period ends. However, loans for those with small deposits will also undergo more scrutiny. So too will loans to those with lower incomes.
- Finally, the APRA wants lenders to re-examine their serviceability metrics. Lenders use these metrics to determine your ability to repay your loan. They include your income and expenses. Each lender has a different way of determining your serviceability.
As you can see from the language, the APRA wants to make it tougher for you to get a loan.
Why would the APRA want to quell investor activity?
It seems to come down to steep increase in property prices across Australia in recent years. In particular, prices in Sydney and Melbourne offer cause for concern.
Investors and homeowners have benefited from a growing property market for a number of years. Their property’s value grows quickly, which means they benefit when selling. The problem is that such unrestrained growth has made it more difficult for buyers. First-time buyers, in particular, struggle to buy in many of Australia’s major cities.
Many analysts believe there’s a property bubble brewing. They note that such huge rises can’t last forever. Eventually, the market will have to readjust or collapse.
A collapse is exactly what the APRA wants to avoid. So, why the focus on making things more difficult for property investors?
It comes down to the competition that such investors create. They have access to interest-only loans that have traditionally increased their borrowing power. This means they can put up a tougher fight against residential buyers. They can offer more money, plus they provide more competition. The end result is that sellers feel confident in asking for higher prices. This makes it even harder for owner-occupiers to secure their own properties.
So, we can surmise that the APRA wants to make the market less favourable to property investors. First-time investors will clearly struggle to gain access to interest-only loans. But what if you already have a property portfolio and you’re considering expanding?
How This Affects Property Investors With Portfolios
Firstly, let’s look at how these new guidelines may affect your current interest-only loans.
Those with fixed interest rates don’t need to worry. At least, not yet. Your lender will honour the interest rate attached to your loan for the duration of the fixed term. Assuming you make no changes to your portfolio, your outgoings should remain the same for a while.
The problem may come when you switch to a variable rate loan. The APRA’s requests have caused many lenders to increase the rate on their interest-only loans. This will affect your existing loan when you’re on a variable rate. Expect to see a slight increase in the amount of interest that you pay.
Now, what about those who want to add to their portfolios?
You can expect to face much more stringent serviceability requirements before getting a loan. This is likely to be the case even if you don’t apply for an interest-only loan. Lenders will want to see that you have a strong income. Moreover, they may not count as much of your rental income as they previously did towards your serviceability. But those with strong incomes and good equity should still find themselves able to access interest-only loans. You just have to jump through a few more hoops to get there.
Make sure you have up-to-date tax returns available. Furthermore, make it a point to get the documents that your lender requires to them as quickly as possible. This shows that you’re serious and will thus count in your favour when applying for a loan.
What If You Want to Use Your Equity?
Many property investors who have portfolios use the equity from the properties they own to buy new properties. You’ll face greater challenges in the current climate if that’s your intention.
It all comes down to interest rates. Currently, interest rates stand at between 4.5% and 5%. Before the new guidelines, that’s likely the rate that your lender would have used to determine your serviceability.
However, it’s likely that some lenders will raise that rate. Moreover, they’ll apply it across your entire portfolio. They’ll want to see that you can service all of your loans at a rate of about 7.5% per year. Moreover, they’ll want to see that you can do this for principal and interest repayments, rather than interest-only repayments.
This creates issues for investors using interest-only loans across multiple properties. You can’t rely on your current income to prove your serviceability. Instead, you need to prove that your income can cover larger repayments than before.
Overall, this makes it much more difficult for investors to use their equity to help them secure new loans. It’s not impossible. But you need to have a strong financial base to have a chance of getting a new interest-only loan in this situation.
Of course, the 30% limit is also going to cause a problem. Lenders will only allow the most low-risk borrowers to access interest-only loans. You may not fall into that category if you’re using the equity on a property that you’re still making repayments on. Anything that increases your risk level makes you less likely to secure a loan.
Other Factors That May Affect You
So, property investors who have portfolios will see some effects. It’s possible that you’ll have to pay a higher interest rate on your current loans. Plus, you’ll find it much more difficult to use your existing equity to access investor loans.
However, there are a few other factors that may affect you. These include the following:
- Location and Type. In accordance with the APRA guidelines, lenders will pay more attention to the type of property you want to buy. They’ll also look deeper into the location. This affects those who use negative gearing to their advantage. Lenders may want to work mostly with investors who buy properties that can generate quick returns. Investing for the tax benefits of negative gearing may become more difficult. In fact, many lenders now won’t consider those tax benefits when working out your serviceability.
- Refinancing Issues. It’s not just refinancing to access equity for other purchases that may cause problems. Anybody looking to refinance to reduce their debt or access a better mortgage may struggle. Lenders may refuse a refinancing request, even if it’s not for building your portfolio.
- Rental Income. Investors with large portfolios often rely on the income from their properties. However, most lenders will now consider no more than 80% of this income when assessing serviceability. Many use a lower percentage. You may have to broaden your search to find a lender with more favourable conditions.
- Higher Interest Rates. Many lenders have increased the interest rates attached to their investor loans. In many cases, these rates now exceed those offered for owner-occupier loans. You may be able to use this to your advantage if you’re willing to occupy your new investment property for a while.
- Evolving Guidelines. It’s likely that the APRA will adapt its guidelines over time. What’s happening right now isn’t all that you must concern yourself with.
The Final Word
The new guidelines affect both new investors and those with established portfolios. On a general level, you’ll find it hard to access interest-only home loans. This is especially the case if you want to use equity from your current portfolio. Furthermore, you may find yourself paying more interest on the properties that you already own.
But it’s not impossible to get an interest-only loan in the current conditions. You just have to go to greater lengths to prove your serviceability. Plus, you may have to find properties that your lender deems appropriate for the loan. That’s where Cohen Handler can help. Contact our buyer’s agents to find out how to access great investment properties today.