Over the past six months, grey clouds have been building in the distance for borrowers, and for many, the brewing storm is yet to hit in full force.
Australia’s current lending landscape is a tough one. Moves by legislators and regulators to kerb borrower enthusiasm have created headaches for those now looking to build a portfolio. That said, there is opportunity ahead for those able to weather the challenge.
The state of play
The runaway nature of Australian property prices in Sydney and Melbourne from 2012 was causing concern for legislators. It was claimed investors were taking up all the stock and isolating first homebuyers from the market – and there were no indications things were going to slow down. In 2014 the Australian Prudential Regulation Authority (APRA) responded by instructing banks to cap growth in investor lending to 10% of their total loan book. An additional move in 2017 by APRA required banks to keep interest-only loans to less than 30% of their mortgage portfolio too. While both these measures were said to be temporary – in fact, the first has been recently relaxed – they appear to have done their job too well with investor-loan growth now at single-digit percentages. Add to the mix the current banking enquiry. It’s findings so far have levelled criticism at bank practices. To compensate and prepare for the eventual recommendations, lenders are already tightening their requirements from borrowers – particularly investors.
The upshot is that getting a property loan approval at the moment is tough.
It’s been a fast turnaround too. Whereas six months ago a bank customer might have been approved to borrow $800,000, nowadays that same client might be lucky to get $500,000.
That means many who contract to purchase based on a pre-approval gained under the old guidelines, will find their application knocked back under the bank’s new rules.
Another reason for impending mortgage stress is many loans are about to roll over from Interest-only to Principal-and-Interest in the next 12 months. This means higher repayments for some already stressed borrowers. These customers will have little choice but to accept the new loan terms being offered by their current lender, because competition for Interest Only lending will be virtually non-existent.
Here’s the perfect storm scenario –
• The cost of money will go up,
• The availability of money will drop,
• And, in certain markets, value growth will be non-existent for a number of years.
Is there opportunity?
In short – yes, but it’ll be those who got their affairs in order early who’ll benefit most. Investors who’ve built a resilient portfolio are certain to take advantage. Your investment strategies must be long-term so you can smooth out the peaks and troughs of market and finance cycles in order to secure your future for decades to come.
1. Have impeccable records
Now more than ever, it’s important to have kept your financial records in tip-top order.
By this, I mean you need to know your numbers inside and out, and back to front.
It all has to be documented as well. Not so long ago, for example, it was acceptable to front up to the bank with little more than your estimated living costs and gross income, and with a signed statutory declaration as back up.
Nowadays, it’s a case of being able to account for every dollar. You may have put “Annual clothing allowance – $1000” in the loan application, but today’s banking credit departments are checking your credit card statements as well. They know your Gucci shoes and Burberry briefcase cost twice that, and they’re willing to say, “No!”
Having impeccable records means you can accurately account for every dollar. It also demonstrates to the bank that you can stay on top of your loan commitments.
Being a good customer really can pay dividends in these trying times.
2. Maintain cash flow
Cash flow is king when it comes to loan serviceability, so if you’ve built a multi-property portfolio, make sure your income isn’t overextended. Key to this is portfolio diversification.
We always recommend maintaining a buffer as part of your investment strategy because changes in interest rates, personal circumstances and the cost of living are inevitable.
In addition, banks are now upping their ‘stress test’ on client’s finances – increasing their own interest rate and cost tolerances on your supplied numbers.
Being on top of your cash flow can be the difference between a yes or no on your next loan.
3. Equity buffer
Along with cash flow you must maintain an equity buffer as well. Having adequate equity is essential to a lender’s requirements.
The problem that often occurs during a period of high property value growth (like recently) is some owners use their new-found equity on unproductive debt. They might spend up big on their credit cards and then consolidate that debt into their house loan. While they’re at it, they might get a bit extra from the bank in order to buy a new car or go on holiday.
These borrowers are not allowing for the future and have effectively re-bought their property off the bank at today’s prices because they ‘feel wealthy’.
The best opportunities are there for those who have liquidity in their equity. I’m a big believer in making your money work for you and if your equity isn’t liquid, you can’t capitalise on opportunities when they arise.
Building a resilient portfolio in times of great growth is essential so you not only survive any eventual slowdown, but can pounce on newly revealed profitable prospects. If you’ve failed to prepare for our new, tougher financial times, now might be the chance to catch your breath, talk to an expert strategist and plan for the cycles next turn.
After all, the state of your wallet dictates the state of your mind.