There have been a lot of changes to credit policy for investors lately and is a topic that clients and business partners are always asking about. So I thought I would highlight some of the significant changes and impacts they are likely to have on the overall lending and real estate landscape.

Why the changes?

Back on the 9th December 2014, the Australian Prudential Regulation Authority (APRA) had written to all authorised deposit-taking institutions (ADIs) / banks outlining what steps they should take to maintain Australia’s sound residential mortgage lending practices. Their concerns were based around historically low interest rates, high levels of household debt, strong competition in the housing market and accelerating investor credit growth.

So why are the lenders making changes based on this letter and why did it take that long to make the changes in the first place?

First of all, the ADI’s. which include all banks, didn’t want APRA to mandate the requirements, by increasing capital requirements or place caps on particular types of loans and therefore have acted on their own accord instead of APRA enforcing these changes upon the banks.

Secondly, they needed to do their own research on the impact of these changes on their business, plus in my opinion they wanted to capitalise on the current conditions as much as possible and increase their market share in the meantime. They also wanted to see who would be the first to make the move. In May 2015 one major lender made the first move and since then it’s been like a domino effect with each lender in one way or another changing the way they lend to investors.

So lets look at the three key areas of concerns of APRA in that letter:

1. High risk mortgage lending – Some examples that APRA classify as high risk include: high loan-to-income loans, high loan-to-valuation (LVR) loans, interest only loans to owner occupiers, and loans with very long loan terms.

2. Strong growth in lending to property investors – This is one of APRA’s main concerns and explains lender’s recent credit changes. APRA has indicated that if a property investor growth continues above the 10 per cent threshold, it will consider the need for further action.

3. Loan affordability tests for new borrowers – In APRA’s view, these should incorporate an interest rat buffer of at least 2 per cent above the loan product rate. and a floor lending rate of at least 7 per cent, when assessing borrowers’ ability to service their loans. Good practice would be to maintain a buffer and floor rate comfortably above these levels.

So what have some of the lenders done to address APRA’s concerns and slow down credit growth to investors?

1. Reduced the loan to value ratio for investors to 80% –  Some lenders have reduced the loan to value ratio by state only (NSW) and others have decided to make the change across all markets and limit borrowing to 80%.

2. Reduced the interest rate discounts for property investors – Those taking out investment loans now are generally not receiving the same discounts as for those with owner occupied loans. When I first started in the finance industry 14 years ago, property investors were back then were paying 10 – 20 basis points more for their home loans.

3. Reducing the amount of money you can borrow from the bank – This has been achieved in a number of ways including: increasing the interest rates for investors; increasing the interest rate buffers for new loans; changing how much rental income can be used for servicing; increasing the stress test on your existing loans and other commitments. As a result I have seen client’s borrowing capacity reduce in some cases by $100,000’s as a result and one of the lenders that used to lend the most is now towards the bottom of how much you can borrow.

4. Provide incentives for owner occupied loans – In order to balance their home loan exposure and to balance out the growth of investor loans in their businesses, some banks are offering very attractive specials for owner occupied loans. These specials include interest rate discounts, cash incentives up to $1,250 to refinance your home loan and one lender recently announced they would pay your mortgage insurance up to 85% for owner occupied loans for limited time only.

5. Provide incentives for those borrowers making principal and interest repayments – Generally property investors take out interest only loans for their investment properties, so some lenders are providing further interest rate discounts for new borrowers making principle and interest loan repayments in order to balance up their loan books.

Do the above changes made by the banks recently address APRA’s specific concerns?

Yes. These changes are prudent and responsible and address APRA’s specific concerns.

Will these changes slow investor growth to less than 10%?

We are slowly seeing the impact of these credit changes coming through. It could be another 3 – 6 months before we get some accurate data, but I do believe it will slow down investor growth in certain states. Property investors in Sydney may look interstate or to regional areas to purchase their next investment from an affordability and rental yield perspective.

I am thinking of investing in property soon, how will this impact me?

If you are sensible and not wanting to borrow to your absolute maximum and are able access equity in another property or a good amount of savings, you should be fine. The borrowers on the other hand that are targeting property at the upper end of their borrowing capacity with little equity or savings will be impacted and may need to come up with another investment strategy.

With all these changes to credit policy recently, it’s important to work with your finance professional to make sure your finances are structured correctly and you don’t get caught out by these changes.

If you work in the finance or real estate industry, I would be interested to know your thoughts?

About the author, Theo Angelopoulos is both a mortgage broker and financial planner and has been in the financial services industry for 14 years. Theo has a passion for property and enjoys helping busy professionals getting into the property market and getting their entire financial world in order. Theo operates two businesses based in the Sydney CBD, The Loans Analyst a mortgage broking business and GPI Financial a boutique financial planning practice providing holistic financial advice around superannuation, insurance, budgeting and investments.