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.
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?