The days of cheap lending for investors is over
If you're about to get an investment property loan, be prepared to either pay a little more in interest or have a fatter deposit if you are dealing with an authorised deposit-taking institution (ADI).
ANZ, for example, has withdrawn interest rate discounts on its investment property loans if you don't have an owner-occupier home loan with it.
By no means is it alone. Commonwealth Bank has stopped discounts for investment loans and $1000 investment home loan rebate offers and Bankwest now requires a minimum 20% deposit on all investment loans.
It is almost seven months since the Australian Prudential Regulation Authority (APRA) announced a major overhaul of investment lending, which has fuelled house price rises, particularly in Sydney and Melbourne.
To address the risk that the housing sector may be unbalanced due to speculative buying of homes to rent, APRA introduced several measures for ADIs, including a 10% effective speed limit on the annual growth of banks' pool of investor mortgage credit.
While JPMorgan economist Stephen Walters believes APRA will probably have to use more than moral persuasion to get lasting results - pointing to New Zealand's more aggressive approach - there is already change in the lending market, says Joe Sirianni, executive director of Smartline Personal Mortgage Advisers.
"We are already seeing some investors, particularly those who were looking to aggressively grow their property with cheap finance, running into some problems," he says.
"Some lenders are starting to actively raise the bar in terms of the requirements investors have to meet in order to secure finance."
Sirianni says investors seeking a loan will face the following challenges:
- Concerned about investors managing their mortgages, most lenders will restrict and reduce the number of interest-only loans (primarily used by investors).
- Investors will not get the discounts they were offered in the past.
- Despite low rates, some lenders are using an assessment rate of 7.1% to test if an investor can service the loan.
- Investment properties purchased in "hot" markets will have a higher assessment rate - a postcode weighting -applied to them.
Sirianni makes the point that lenders with a lower ratio of investment loans in their books may be keen to attract more investor customers, while lenders with already high levels will focus on owner-occupiers.
Having said that, lenders with the largest investment loan books currently will be at an advantage with a 10% blanket growth cap.
A recent report by CoreLogic RP Data explains that the two banks with the largest portfolio of investor loans, Westpac and CBA, have investor loan books of $146.7 billion and $123.5 billion respectively.
Limiting growth to 10% annually would mean they could build their investment loan books by $14.7 billion and $12.3 billion respectively.
In comparison, the No. 3 and No. 4 banks (NAB and ANZ) could build their books by only $6.3 billion and $5.9 billion to remain under the cap.
For investors seeking finance, this could mean a couple of things.
You may have more luck getting a loan with one of the two major investment lenders, although pricing won't be discounted.
You could possibly get a better deal from a non-ADI, as they aren't affected by APRA's warnings. As Sirianni says, these lenders go under the radar.
"They can now grow their portfolio and we are seeing plenty of them using this opportunity to grow market share."
Home owners may also benefit as no lender wants to contract its growth.
With lending limits placed on investment loans, their only option for expansion will be in the owner-occupier sector, meaning competition should fire up even more. Which can only be a good thing for those of us who want a home loan.