The good news is that by taking your time to research the best lending rates available to you, you can make the best of a challenging investor environment.
As with all of the tips I pass on to you, number one is to get educated on every aspect of property investment. Knowledge in this trade is worth money to you. Being armed with good quality, up to date information will help put more money into your pocket, or into growing your property portfolio.
On the go? Here’s 30 seconds of key take outs:
- Late in 2017, the Australian Prudential Regulation Authority (APRA) introduced lending changes that effectively tightened up lenders capacity to loan money. It is a risk management move by APRA, but has made lending to invest tougher than it has been before.
- Ideally, you should aim to save a deposit of at least 20% to secure an Interest Only loan and optimise capital gain benefits that will enable you to grow your property portfolio. However try where possible to minimise your deposit.
- Despite tighter lending and higher rates there are still many benefits to be gained by investors serious about reaching their goals. Education is your artillery.
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Lending changes for investors introduced by the Australia Prudential Regulation Authority (you’ll hear this mostly referred to as its acronym – APRA) in late 2017 are being felt by investors around Australia.
The changes make the process of gaining finance more complex, and lenders are scrutinising investors like never before.
“There has never been a more challenging time for investors to gain finance.”
That said, the financial lending landscape continually changes. As of the 26th of April this year (2018), APRA announced that it will remove the 10% investor loan growth benchmark that it had in place, to help improve the quality of lending, and lift capital resilience.
In property investment ‘tradie terms’ this means that as of now, lenders have a little more breathing room to loan more money across their lending portfolio, to investors.
Authorised Deposit Taking Institutions or ADIs [Banks], are required to factor in around two to three percent on top of their Interest Only loan rate, to calculate your ability as an investor to service the loan. This ‘serviceability or assessment rate’ is also referred to as the stress test.
This really pushes the Interest Only rates up well above the current variable interest rates available to home owners.
How the assessment rate is calculated for the borrower is it is applied to the existing loan as well as the current loan being applied for. Meaning, the stress test is applied to your current borrowing as well, not just to the new loan you’re applying for.
Loan to Value Ratio (LVR) tapped out from 90% to 80% Interest Only Loans
Compared to when I started out in property investing, today’s investors are required to save a larger deposit (that is compared to coughing up a 5-10% deposit ‘back in the day’), or use more equity for the property security.
Investor loans from some banks have been capped at 80% loan to value ratio (LVR) meaning investors have to put in 20% deposits. This is part of what I mentioned earlier, where banks and ADIs have had to tighten up how much they lend to investors based on benchmarks set by APRA for investment property loan growth. Whether lenders will start relaxing this 80% loan to value ratio in response to APRA’s recent announcement, is yet to be seen. ADIs still need to be showing that they are taking a strong risk based approach to lending and they may be hesitant to head back toward a 85% or 90% LVR. Almost all banks are now doing 90% LVR’s on investor loans but a on a principle and interest basis.
Discounted rates for investors is less likely in a risk aversive market
Again, back in the day, some lenders would have the freedom to offer you, as an investor, a discount on new and existing loans. Because of the tightening up of lending and a tighter investor loan growth benchmark, lenders are unlikely to have an appetite to offer discounted rates.
Principal and interest loans for investors
Many lenders are encouraging investors to pay down their debts by signing up to Principal and Interest (PI) loans instead of Interest Only (IO) loans. If you have multiple investment properties, an IO loan will help you manage your cash flow.
Online tools to help you compare loan rates
Use these investor tools to research the best available rates:
Interest rates to remain stable
The Reserve Bank of Australia (RBA) the body that sets the cash rate each month, seems to be happy with the way things are continuing to shape up in 2018. This is always good news for investors. Take advantage of the low interest rate environment while it lasts.
And if you find yourself a little stuck about how to best fund your next investment, or what to do about your existing one, my property investment finance brokers are always eager to help.
Guest Blogger: Chris Raymond | Director of Unconditional Finance