Australian lenders tighten lending policies for investors

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Australian lenders have changed their policies to focus more lending toward home-buyers rather than investors.

This change has more-or-less been forced upon them by government regulation, as a result of the perceived risks to the property market brought about by strong recent price growth.

What changes are they making?

Well since APRA has determined that banks should not allow their investment lending books to grow by more than 10% in the next year, they are making the lending rules tougher for applicants wanting investment property loans. This will most likely have the greatest impact upon those investors who already have multiple properties with mortgages. These borrowers will have their existing mortgages treated much more conservatively, to restrict the amount of new lending possible.

For example banks will calculate and use the theoretic value of all your mortgage repayments based on principal plus interest over the remaining term, at a buffered, much higher interest rate – often much higher than the actual rate you can obtain for a new mortgage, and almost certainly much higher than the actual amounts you are paying on existing mortgages, each month. This has the effect of reducing your theoretical net income after taxes, living costs and existing mortgage payments, so less is available to afford a new purchase.

In fact, in an unprecedented move, APRA has actually mandated to banks the level of this buffered-interest rate assessment, suggesting what they think the minimums should be, suggesting buffered-rates should be at least 2 percentage points above the actual loan interest rate!

Other APRA-induced changes include reducing the maximum loan-t0-value ratios for investors down to an average 80% amongst most lenders.

APRA has communicated that “This is a measured and targeted response to emerging pressures in the housing market.”

Another change we are seeing is the removal of promotions and special discounts for investment property lending – versus homeowner lending, in a measure aimed perhaps at reducing demand.

Let me know if you have any queries on the effects for your property plans.

From a relative perspective it’s important to note that generally Australians tend to borrow much more to invest in property compared to most mortgage markets in the world.

Daniel, Aussie Finance and property group.

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