Banks tighten lending requirements for investors
It is hoped that a rise in interest rates on investment loans will act as a disincentive and cool speculative investment in the property market. No doubt the rate rises will also help the banks recoup the costs associated with the new level of capital they must hold now to protect against this specific investment property related risk.
Banks are also demanding higher loan-to-valuation ratios (more equity than debt) among fears that some investors are overstretched and may have difficulty servicing debt if rates rise or house prices fall. These concerns are also causing some lenders to back away from the SMSF property market which has grown rapidly through heavy promotion of borrowing in super in recent years.
What changes can you expect to investment loans?
Lower loan-to-valuation ratios (LVR)
Lenders are seeking a maximum 80% LVR (previously has been higher) because property values would have to drop by more than 20% before the loan amount exceeds the value of the asset. The main impact of lower LVRs is that you need a bigger deposit or extra equity to buy a property.
Increased stress-test rate on loans
When banks approve investment loan applications a couple of percentage points are added to the standard variable rate stress testing to ensure the mortgage holders will be able to repay the loan if interest rates go up. Right now the standard variable rate is around 5% but you’ll only qualify for an investment loan if you can meet repayments at the stress-test rate of 7-8%.
Discounts will be harder to come by
In the current environment, banks have been willing to offer discounts on investment loans but those days are coming to an end. Even some of the more experienced mortgage brokers are finding it tough to negotiate significant discounts.
Our advice?
It is getting tougher to borrow for an investment property and for good reason, but the right advice before you purchase is likely to save you time, money and effort when selecting a suitable loan or help you reconsider your options.
General advice disclaimer: This article has been prepared by FMD Financial and is intended to be a general overview of the subject matter. The information in this article is not intended to be comprehensive and should not be relied upon as such. In preparing this article we have not taken into account the individual objectives or circumstances of any person. Legal, financial and other professional advice should be sought prior to applying the information contained on this article to particular circumstances. FMD Financial, its officers and employees will not be liable for any loss or damage sustained by any person acting in reliance on the information contained on this article. FMD Group Pty Ltd ABN 99 103 115 591 trading as FMD Financial is a Corporate Authorised Representative of FMD Advisory Services Pty Ltd AFSL 232977. The FMD advisers are Authorised Representatives of FMD Advisory Services Pty Ltd AFSL 232977. Rev Invest Pty Ltd is a Corporate Authorised Representative of FMD Advisory Services Pty Ltd AFSL 232977.