Tougher conditions for investment property loans
Investing in residential property has always been a popular option for Australians. Add low interest rates and a buoyant market to the mix and it’s no surprise that it is more popular than ever. But not everyone is thrilled about what’s going on in the property market.
The Reserve Bank of Australia (RBA) is increasingly concerned about rising house prices and the huge influx of investors in the market. In fact, the RBA is so wary that there’s been talk about the potential for stricter lending practices to limit risky investor lending.
Until the RBA makes an official statement on the matter – which is expected before the end of the year – nobody knows what measures are likely to be put in place. Some of the possibilities currently being thrown around in the media are:
- Limits on low deposit home loans: Banks may be restricted from offering low-deposit home loans that have a high loan-to-valuation ratio, such as 90% or 95% loans. However, this would have a big impact on first-home buyers so it seems unlikely.
- Tougher loan hurdles: Banks could be required to use tougher lending criteria when approving home loans for property investors, such as larger interest rate buffers and taking less rental income into account.
- Increasing the risk weighting of investor loans: Increasing risk weightings means the banks would be required to hold more money in reserve on investor loans.
What does this mean for you?
So what does this mean for you as a property investor? Even though nothing has been decided yet, it’s a good idea to start thinking about the possibility of tougher lending conditions now. After all, as the saying goes, ‘fortune favours the prepared mind’.
By taking steps in advance, you may find yourself in a better position to qualify for loans than other investors. Here are six things that could help you receive loan approvals in a tougher lending environment.
- Reduce your debts
Reduce the level of debt you currently owe on personal loans and credit cards. Reducing the limit on your credit card could also help.
- Be realistic about rental income
Many lenders will only use 75% or 80% of your rental income when assessing your borrowing capacity. So take this into account when calculating how much you can borrow and you’re less likely to be knocked back.
- Don’t rely on negative gearing
Fewer lenders may be prepared to take negative gearing into account under stricter lending conditions, so having a positively geared property may give your borrowing capacity a boost.
- Work on a higher interest rate buffer
Currently, many lenders only calculate a buffer based on an interest rate rise of 2%. This could double if stricter lending measures are introduced. So it will be worthwhile seeing what your repayments would be if interest rates went up 4-5%.
- Be choosy about your investment property
Lenders find some types of investment properties more acceptable than others. For example, they prefer properties that have a particular floor size, age and location. It may be worthwhile finding out what these criteria are before searching for your next investment property.
- Shop around more
Limited availability could be one of the knock-on effects of banks being forced to increase the risk weighting of investor loans. If this comes about, you’ll need to be prepared to shop around to find the right loan.