How Bank Lending Affects Property Investing
I recently met with my personal finance broker and we discussed Property Investing and Bank Lending (and Govt bodies like APRA) and how they have a major effect on the property investing arena.
What impact did the Banking Royal Commission have on property investing?
The financial services royal commission has had an impact on the way the banks are assessing home loan applications.
APRA also tightened the screws on how much investment debt the banks could carry. (Yes that’s right, a Government body APRA can dictate to the banks what they can and can’t lend)!
In the last six months, the banks are requesting more information on 57% of loan applications (compared to 36% last year).
The total number of home loans submitted to settled are in line with previous years.
So in other words, the Property Investing and Bank Lending institutions are asking for more information and taking more time to assess, but still approving the right loan applications.
So, what is the secret to getting property investing loans approved?
Get advice from a switched-on finance broker. His job is to look at all the other banks and lenders to find you the right deal.
Different lenders have different policies. Where this impacts lenders today is with the banks’ serviceability benchmark rates.
This means that some banks will assess the loans you hold them at a higher interest rate than those held with another bank.
Put another way, say you have an existing loan of $500,000 with bank A, and you’re looking at applying for a new loan of $250,000.
Applying with that same bank will mean they assess your existing loan at 7.25% based on P&I repayments.
If that $500,000 loan was held with another bank, and you were applying with Bank A for a new loan of $250,000 they would take the repayments of the $500,000 mortgage at the actual amount being closer to 4% increasing your borrowing capacity.
A quality finance broker knows this stuff and he is a valuable member of your team.
Don’t just walk into a bank and expect specialist advice because the bank manager will only sell you on that particular bank’s products and loans.
What would have been considered insanity a few years ago is now a reality?
After APRA’s putting the brakes on the banks a couple of years ago, investment interest-only loans attract a higher interest rate.
It may pay to look at principal and interest options as well; it might work out to be better for you.
According to Macquarie Bank, “using a 0.5 percentage point [interest rate] differential, Macquarie found that a bank customer in the top tax bracket with a $500,000 loan would be $6,000 better off after five years, and $12,000 better off after ten years switching to P&I.”
Lender, lender, lender?
With property investing it used to be location, location, location but now its lender, lender, lender.
If you can’t get the right loans you will be restricted to where you can afford to buy which has a huge impact on your wealth creation.
Another policy we are finding can trip up investors is how rental income on property investments is treated.
Some lenders will reduce rental income by 20% to 50% depending on the specific property or building (presumably determined by the lender’s total exposure to that area or apartment complex).
Ask your mortgage broker to check ahead to make sure you don’t get caught out.
Above all take some form of action TODAY, not tomorrow.
Ready to take the next step?