Category Archives: Home Buyer

Recent changes in the home loan sector

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Investment lending changes

If you are an investor, you must be following all the changes in the lending sector. This has been going on for a while and you can read my June article here – in case you missed out on what was happening.

A week or so ago, I attended a session conducted by one of the lenders and here are some points that I picked up from the economist.

There could be a rate cut by the Reserve Bank of Australia (RBA) in November 2015, which could see cash rate as low as 1.75%. This will then stabilise and remain there for a while.

Apparently, businesses are growing and this is evident from the increased job ads on different job websites. I guess this is good news for the Australian economy and those of you looking for a job!

As for investor lending, I heard some interesting news on how it came to all the changes that are being made currently.

There are three regulatory bodies trying to control the investor lending – APRA, ASIC and RBA.

Australian Prudential Regulation Authority or APRA is focusing on the servicing side of home loans. Australian Securities and Investment Commission or ASIC is more concerned with NCCP or responsible lending. Lastly, RBA does it part by controlling cash rate.

All these bodies have been asking lenders to curb investment lending since mid 2014. In December 2014, APRA noticed that lenders were not slowing down and still lending increased LVRs to investors. Hence it stepped in to curb investment lending to 90%. The trend still continues where some lenders have now restricted investment lending to 80% and AMP has pulled out of the investment market till later this year. This is seen in the SMSF market and non-resident lending as well.

At the same time, ASIC being concerned about responsible lending saw that investors were still borrowing interest only home loans and hence stipulated rules around increasing servicing buffer and assessment rates to slow down lending. This has affected almost all lenders – but some specific ones who earlier assessed on actual rates like Westpac, Macquarie and NAB Broker.

The regulators are managing investment lending through different pricing structures not just for LVRs, but for investment vs owner occupied loans, sometimes even principal and interest vs interest only loans.

If you have seen interest rate changes for investors, beware that pricing changes are on the way for owner occupied loans as well, says the economist. This can be in the range of 25 bps to 50 bps.

It can be quite confusing with all these changes, so if you have any questions at all, feel free to touch base with us.

Bank Changes are here – June 2015

Home Buyer, Money

For those of you who have been following the news, what a way for APRA/ASIC to step in and control investor lending! These regulatory bodies wanted the lenders to tighten their investor lending and it has taken place with a shock to both lenders and investors alike.

As RBA kept reducing the interest rates, APRA realised they had to curb investor lending especially with the hot property market in Sydney and Melbourne.

Banks logos

 

One of the initial changes was the pulling back on additional rate discounts for investors. This was not a big deal in itself because even though investors had to pay slightly higher rate, they would have been able to borrow.

Some of the banks reduced the amount they wanted to lend to investors. For example Bankwest and Heritage Bank pulled back to 80% maximum lending for investors. The change came into effect immediately which means that many investors with existing pre-approvals at these institutions had to find another lender and also got hit with another credit check on their credit file.

The biggest hit to investors is the changes made to the way existing debts were serviced. What Westpac did was that they pulled out negative gearing from their calculators – this meant that investors had to be able to service existing and new debts without the benefit of negative gearing, in short – their salary/wages had to support new borrowing.  Another change was the increase to their buffer to cover debts with other lenders.

To explain the buffer concept with numbers – if your debt of $400,000 was interest only at 4.9%, serviceability was calculated on interest only repayments of $19,600 per annum. Post changes, servicing was calculated on an increased rate of 7.4%, not as interest only repayment, but as principal and interest repayment. This means that they calculated your repayment as $33,234 per annum. So, this one change greatly reduced borrowing capacity for investors.

Just today CBA has announced  similar changes to their investor lending – to include pulling back negative gearing for loans above 90% and increased buffer on existing debts.

Some of the unexpected changes included NAB, Macquarie, AMP and other NAB backed products reducing their investor lending to 90%.

Regardless of these changes, always spread your risk with different lenders minimising your risk of one lender’s policies and servicing.

Maybe this is one way of curtailing high borrowing by unsophisticated investors who can be caught out later when the interest rates actually increase.

What are your thoughts? Do you think it was wise for APRA/ASIC to control investor lending? Maybe they have avoided another GFC?

The pros and cons of interest only loans

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The pros and cons of interest only loans_001

Investors often choose interest-only loans to build their property portfolio. I’ve been asked about it often and here are my thoughts.

What is an interest-only loan?

Normally, when you take up a home loan, you need to pay a portion of the principal and interest (P&I) every month. With interest-only loans, you only pay the interest component of the loan and not the principal component. These loans are usually 5 to 10 years interest-only, after which the bank will want you to pay off the principal.

During the term of the interest-only loan, your repayments will be lower and hence make it affordable for the first few years. Some examples of when interest-only loans are chosen over P&I loans.

a) You are currently on one income and your wife is on maternity leave. You know that once she goes back to work, you will have more cash flow. So, to make it easy on your cash flow, you may choose interest-only option for 3 – 5 years.

b) Another example is when investors are building their property portfolio and want to keep their borrowing capacity to the higher limit or make minimum repayments only, they may choose interest-only loans.

c) First home buyer who wants to get into the property market, can choose interest-only loans to make it easy with their repayments for a while.

Advantages of interest-only loans

  • Tax deductions: Investors are often advised to take up interest-only loans because the interest component is tax deductible and hence they just pay what they can claim. This can help them in two ways. One, if they want to increase their borrowing capacity a little bit to be able to borrow more, this can help. The second is that they can use the extra cash flow to reduce their non-taxable debts.
  • Lower repayments: For the term of the interest only loan (1 – 5 years normally), you will be making lower repayments than a P&I loan. This helps when you are under a tight budget, but know that your financial position will change in the near future.
  • First Home Buyers: As mentioned above, interest-only repayments help first home buyers to get their foot in the door sooner and hence get into the property market without being overwhelmed.

Disadvantages of interest-only loans

  • Not gaining any equity: When you repay only the interest portion, you don’t reduce the principal component and hence you will not gain any equity in the property until you are making interest-only repayments.

If you want to sell your property post interest-only term (be it 5 years or 10 years), your loan amount will not have gone down and you will be liable for the full loan amount back.

So basically, unless your property value has gone up during the interest-only term, you will not have any equity.

  • Higher repayments at the end of the interest-only term: Once the interest-only term finishes, you will be asked to make higher repayments.

Example: Let’s assume you took a 10 year interest-only repayment option. At the end of the 10 years, you will be asked to make principal and interest repayments over 20 years, which can be a large increase in your repayments. This can often catch you off-guard because you were not expecting it.

  • Affordability: You may be better off in the initial interest-only term, but if you don’t plan for the future, you may find yourself struggling to pay off the principal and interest afterwards. Also, the interest that you pay post IO period can be quite high.

Always consider the pros and cons of any loan feature and make a decision that will suit your lifestyle. If unsure, feel free to call us to help you make that decision.