Over the last two months the Australian residential lending markets have been under substantial changes, with shifts in lender policies and interest rates. The Australian Prudential Regulation Authority (APRA) has been responsible for applying pressure on lenders to try limit their investment lending growth through the higher stress testing of debt calculations, increases in deposit requirements and reduction in interest rate discounting for investment finance.
What is APRA
The Australian Prudential Regulation Authority (APRA) is a statutory authority of the Australian Government and the prudential regulator of the Australian financial services industry. The Australian Prudential Regulation Authority (APRA) oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, private health insurance, friendly societies and most members of the superannuation industry.
What has APRA done?
APRA has applied pressure on lenders to reduce their investment lending growth to 10% a year; currently many lenders are far exceeding this, some growing by as much as 40% year on year. To reduce this level of debt growth they have applied pressure to lenders to make adjustments to their policies, primarily targeting the borrowing capacity of investors, but also other areas such as limiting the ability for lenders to negotiate investment interest rates below the advertised rates and increasing deposit requirements through reduced available loan to value ratios (LVR’s).
Why have they done it?
In the current environment investment lending has been growing beyond 10% per annum, which APRA views as a sustainable figure to maintain a robust financial sector. In particular the Sydney and Melbourne market has been performing well above most measures resulting in a rapid expansion in credit and fears of a ‘property bubble’. To counter this, APRA has placed pressure on lenders to cool the market to mitigate any potential market corrections which could cause instability in the banking sector and the greater economy.
What does this mean for me?
This is the most important part – how do these changes affect your current borrowing capabilities and your ability to achieve your goals.
Currently the adjustments made with lenders have included:
- Broad scale reduction in borrowing capacity to investors with existing debt, through the removal of ‘actual rates’ assessment rates
- Increased stress testing of portfolios to assume higher interest rates
- Reductions in LVR’s with many lenders to 80% maximum for investment, not limited to Bankwest, ST Gerry Group (including BankSA), Westpac – this list has been expanding and many in the industry believe this could become the norm
- Removal or reduction of interest rate below the advertised rates – some lenders are still allowing partial negotiations below their standard discounts IF you have a PPOR with the same brand
What can I do to ensure I can still borrow money
Now more than ever having a correctly structured investment portfolio is vital to ensuring you can grow a substantial investment property portfolio. To mitigate the impacts of the policy changes we have a few tips on how to still move forward:
- If you are reliant on accessing equity to provide deposits for your future purchases, touch base NOW so any available funds can be released now while still possible
- Review your purchasing strategy, if your borrowing capacity is significantly reduced, consider whether alternatives strategies such as higher cash flow properties may assist in keeping your borrowing capacity from eroding as fast as negatively geared properties
- Utilising non APRA regulated lenders – we have access to multiple lenders which can still provide the pre-APRA adjusted lending capacities, interest rates and LVR’s through their products
- Consider alternative investments such as Commercial property – there are lending products available to those with limited serviceability to continue purchasing in commercial real estate.
The market continues to evolve every day, so it’s important to understand that any changes in policy may not have completed, with lenders changing their policy sets daily. It’s important to keep ahead of these changes through a carefully structured lending plan.
If you have any questions or concerns about how these changes may affect your borrowing potential, connect with us to find out how we can assure you still meet your long term goals in this evolving lending climate.