Over the past few months, there has been a lot of chatter in the media about APRA tightening controls on lending for investment property purchases. And as property investment is one of Australia’s most popular ways to build wealth for the future, it has understandably raised a lot of questions from our clients about how this will change the game for those currently looking to invest. But what is APRA actually doing and why? How will it affect your capacity to get an investment property loan if you’re looking to buy this spring?
What is APRA?
First of all, we should explain APRA and the role it plays in the finance industry. APRA is the Australian Prudential Regulatory Authority and it acts as Australia’s finance industry watchdog. Their role is to regulate the behaviour of lenders, banks, credit unions, building societies, general insurance companies, private health insurance agencies and the superannuation industry. Their mission is to establish and enforce standards and practices to ensure that our financial industry remains stable, efficient and competitive.
APRA is concerned that the property market is becoming overheated, particularly in Sydney. This follows home price growth of over 18% in the Sydney market over the past year. APRA is concerned that an overheated market may be subject to rapid price adjustments and this could not only destabilize our entire financial industry, but prove to be extremely risky for the average residential property owner or investor.
What restrictions has APRA imposed?
APRA is primarily concerned about the rate at which the big four banks have been issuing property investment loans. In order to cut it back, they have done two things:
Increased the capital reserves the big banks are required to hold for their exposure to residential property mortgages; and
Enforced their requirement that the bank’s investment lending does not grow by more than 10% annually.
The result is that the big four banks have raised interest rates on property investment loans. They have also tightened their lending criteria, so that property investors may now require a larger deposit and must be in a financial position to meet their repayments in the event of significant interest rate rises in future. They are also discouraging interest only property investment loans as these are considered more risky in a property market that may be subject to rapid declines in home values.
How will this affect you if you’re looking to invest now?
First of all, let’s look at interest rates on property investment loans. While it’s true that some banks have raised interest rates on property investment loans, these rate rises only represent a 20 – 50 basis point rise, meaning that the increased interest rate on property investment loans is only a half a percent or so higher on average than most owner-occupier loans. When you take into consideration that interest rates were down to all-time historical lows anyway, this will not prove to be much of a deterrent to those of you looking to invest in property this spring.
Additionally, not all of the lenders are at risk of exceeding APRA’s requirement that investment lending does not grow by more than 10% annually. This means that many of the smaller lenders have not raised their interest rates on property investment loans very much – in fact, some of them have not raised their rates at all.
This is where it really pays to have a good mortgage broker on your team. If you are planning to purchase an investment property this spring then talk to us and we will shop around to find you the most advantageous rate!
What about the tighter lending criteria – how will this affect you?
If you are about to purchase an investment property, then the bank’s tightening of lending criteria may have some effect. It is likely that the amount you can borrow has recently been reduced by 10-15% for the same level of income. Additionally, the big four banks will most likely require a 20% deposit, whereas in the past they would have accepted 10%. (Some smaller lenders are still approving investment property loans with a 10% deposit, so if necessary ask us to shop around.)
The result is that your purchasing power may be reduced and if you want to invest this spring, you may have to look at purchasing a less expensive property. For most property investors, this will prove to be only a minor stumbling block – after all a 15% reduction in your buying power isn’t very much. You may have to work a little bit harder to find a suitable investment, but at the end of the day you will most likely be able to find something that suits your budget.
Good advice is now more valuable than ever
The fact is, it’s more important than ever to be able to get good advice about your loan structuring and a mortgage broker who is able to shop around amongst a wider variety of lenders to get you the best rate the market has to offer.
We’re happy to say that’s our job! Since the APRA restrictions have come into play, we have been able to help several clients find great financing options for their investment property purchases and lower rates for those looking to refinance. We’re confident that we can help you too. If you’re in the market to purchase a property this spring, then give us a call. We’re here to help.