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Lending ‘speed limits’: do they affect you?

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Regulators are taking a closer look at property investment loans as the housing market continues to heat up, but that could be good news for the market.

Property investment is in the spotlight at the moment, with the Reserve Bank of Australia (RBA) and the Australian Prudential Regulatory Authority (APRA) taking a close look at the impact of rising property prices.

When property prices rise quickly, it helps boost the economy, but also puts pressure on some parts of it. Firstly, when people carry a higher level of debt – and therefore risk -  paying off this debt takes up more of their income.

It also creates a risk that property is overvalued, and could come down if there’s a bubble that bursts.

Higher debt and riskier loans also create risks for the banks, which could lose money if borrowers can’t repay their debts. Understandably, regulators are keen to make sure these banks, which underpin our national prosperity, are managing their risk effectively.

Investors play an increasingly important role in this picture, with many Australians keen to ride the wave of prosperity that property can provide. March 2017 data from CoreLogic indicated that investment lending was up 27.5 per cent on an annual basis - the largest increase in three years.

But the volume of investors flocking to property has made the regulators nervous. APRA has introduced measures to restrict investment lending, with the aim of keeping it within a target growth threshold of 10 per cent per annum. The thinking behind these 'speed limits' is to limit price rises, and ensure that loans are only being offered to people who can afford them.  

housing affordability

Interest-only lending in the spotlight

Interest-only loans have become increasingly popular, as they allow investors to tap into the property market without high upfront costs. In fact, APRA reported that in December 2016, 39 per cent of all residential mortgage lending was on an interest-only basis. This has rung some alarm bells for the regulator.

It's concerned that if property prices fall, families could end up owing the bank more than what their home is worth, otherwise known as negative equity.

To avoid this happening on a large scale, APRA has moved to limit interest-only loans, so that they represent no more than 30 per cent of new lending. In addition, lenders need to apply close scrutiny to mortgages with a loan to value ratio (LVR) of 80 per cent or more – where the purchaser borrows 80% or more of the purchase price.

One way banks are likely to achieve this is through higher interest rates. Since March, many lenders have had to  increase rates for a range of mortgage types, but with a particular emphasis on interest-only and investment mortgages. However, these increases are still within a broader context of record-low interest rates, which remain well below long-term averages.

While lenders may be pulling back investor loans to some extent, this creates opportunities for prudent investors. Firstly, it may help to moderate the growth in house prices, and provide more choice for responsible borrowers who are in danger of being priced out of the market.

Secondly, it will be a catalyst for a sensible conversation around property investment, which should never be seen as a ‘get-rich-quick’ scheme, but as part of a long-term financial plan.

YBR’s Mark Bouris recently told The Daily Telegraph that he believes financial advice for interest-only borrowers should be compulsory, to help them understand the risks involved and to gauge if they can truly afford it.

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Can you really afford a loan?

In line with Mark’s comments, regulators have also been looking at ‘serviceability’ - a borrower's ability to repay a mortgage. As RBA Governor Phillip Lowe said in an April 4 speech:

In some cases, lenders are assuming that people can live more frugally than in practice they actually can.

"Too many loans are still made where the borrower has the skinniest of income buffers after interest payments. In some cases, lenders are assuming that people can live more frugally than in practice they actually can, leaving little buffer if things go wrong. So APRA quite rightly has said that lenders can expect a strong supervisory focus on loans with a very low net income surplus."

This means people may have to provide more equity before securing loan approval, or increase their income to a level banks find satisfactory. This is where professional financial advice and working with a mortgage broker becomes even more important,  opening you up to a wider range of financial products, and expert guidance on what you can reasonably achieve as an investor.

In short, APRA’s lending restrictions are actually good news for the property market, as they are designed to increase housing market stability and protect investors.

The goal isn’t to make it impossible to invest, but to ensure that if the property market plateaus, investors will not be left high and dry.

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