APRA (the Australian Prudential Regulatory Authority) has fundamentally changed the ability to investment in property since began proactively enforcing policy changes on banks since April 2015. The regulator has been actively trying to alter how much investment lending banks provide, as well in recent history how much debt in Australia is on interest only terms. This has resulted in lenders putting in policies to reduce the borrowing capacity of property investors through stress testing of existing loans (in most cases by increasing the estimated repayments of loans by over 200% than previously) – which has resulted in investors prematurely running out of borrowing capacity to purchase further investment properties and being denied interest only renewals on their existing loans as lenders deny they have sufficient affordability.
All hope is not lost however, with this evolving environment we as investors just need to become more sophisticated in our strategy by planning for these challenges from day one. Using the right tools and strategies available, it’s still possible to build a strong investment property portfolio over the long term to assist with your retirement goals.
Summary of the challenges in the current environment:
- Investors borrowing capacities are being constrained, reducing their ability to buy more property or make adjustments to their existing loans
- Lenders are increasing interest rates on interest only and investment lending
- Lenders are coming in and out of the market for investors – having to cease lending to investors or on interest only loans, then resuming again at later dates due to having to avoid breaching the regulator dictated maximum growth caps on their businesses
How do we tackle these challenges?
Constrained borrowing capacities
- From day 1 – maximise the efficiency of your lending portfolio
- Have a debt recycling strategy. Through paying down the mortgage on your own residence and drawing these funds back out via a separate investment split, you can maximise the amount of lending used for investment purpose whilst reducing your non-deductible debt – which increases your borrowing capacity. The same can be done with various investment expenses or buying into other asset classes. Get specific advice from your financial adviser about getting a debt recycling strategy setup
- Remove any unnecessary expenses (car loans, credit cards, leases, overdrafts not required etc). Shaving off these expenses can have a compounding increase in your borrowing capacity that will enable you to buy further property
- Pay more attention to the rental yield of your purchases. Whilst lenders do cap the maximum rental yield in their calculations, having a neutral to positive yield on your investment properties will mean that you can spread your borrowing capacity further than if you have a portfolio solely of negatively geared investments
- Plan your diversification strategy from day one. Rental income isn’t the only way you can show investment income when building a portfolio – having a dividend producing share portfolio to compliment your property portfolio can boost your borrowing capacity significantly. As you get to the later stages of your portfolio building its worth considering how you can grow your total household income through alternative asset classes so you can squeeze further purchases
Lenders increasing interest rates:
- consider fixed rates – currently some lenders are offering aggressive fixed rates to secure new business
- consider switching some of your loans to principal and interest– lenders are being told to restrict total IO lending to 30% of total debt in Australia, so there are a number of lenders offering sub 4% fixed rates for investment lending
- use smart structuring from early on – you can use niche lenders which will allow you to draw equity funds/debt recycle on your own residence and have investment debts priced at owner occupied lower rates, than the loaded investment rates which can reduce your interest costs by well over 0.5% per annum
Lenders coming in and out of the market:
- use an investment focused broker who can turn this negative into a positive – taking advantage of lenders underweight on investment/IO lending – getting you access to competitive products
- bank brand loyalty is dead – with lenders being forced to become uncompetitive or even shed investor clients due to the speed limits on their growth – going to your ‘usual’ lender can mean you will be told you have options – where there may be plenty of other options available
- not all lenders are currently under the same rules that APRA are putting forward – investment savvy brokers can have access to products which will have stronger policy for investors to allow you to continue buying property
What does this all mean?
The investing world is evolving and as investors we need to evolve with it to ensure we still benefit from investing in property. If you want to achieve above average results then you will need to put in an above average effort. Take note of these challenges and ensure you factor them into your strategy. Leverage the talents of professionals who can improve the efficiency of your setup and ensure you’re not stopped by unnecessary roadblocks on the way to achieve your investment goals.
Most importantly remember there’s opportunity in every market – you just need to turn problems into solutions.
If you would like to have a discussion about how to future proof your lending structure to maximise your ability to invest, click here to connect with us today