3 Regulatory Changes Affecting Property Investors

What do the APRA announcements mean for your property portfolio?

 In December 2014, APRA, the prudential regulator of the Australian financial services industry, announced an increase in the level of supervisory focus on residential mortgage lending.

This announcement was directed at Authorised Deposit-taking Institutions (ADIs) – including banks, building societies and credit unions – and was a response to a number of indicators: strong growth in investment property loans, high Australian household debt, accelerating credit growth and historically low interest rates.

APRA reiterated the seriousness of its intentions in May 2015, with APRA chairman Wayne Byres saying that: “ADIs with more aggressive practices should fully expect to find APRA increasingly at their doorstep.”

On the upside, APRA did not introduce across-the-board increases in capital requirements or caps on any particular types of loans, but focused its attention on a few key areas.

If you are accumulating a highly geared property portfolio, the recent APRA changes may increase costs, decrease return on investment and force you to act more conservatively. However with rate cuts, the overall effect on your portfolio may be relatively neutral.

If you are accumulating a highly geared property portfolio, the recent APRA changes may increase costs, decrease return on investment and force you to act more conservatively. However with rate cuts, the overall effect on your portfolio may be relatively neutral.

Higher-risk mortgage lending

Lending that is considered “higher risk” includes high loan-to-income loans, high loan-to-valuation loans, interest-only loans to owner-occupiers, and loans with very long terms. APRA warned ADIs that increases in this type of lending could trigger further supervisory action.

Investor Impact: ADIs are likely to make it harder to get a loan without a decent deposit or with limited cash flow.

Investor loan growth APRA set a benchmark of 10 per cent portfolio growth for lending by ADIs to property investors – ADIs exceeding this threshold may attract further scrutiny.

Investor Impact: ADIs will probably try to slow their investor loan portfolio growth so that they don’t exceed APRA’s benchmark. This could include removing discounts on investor loans, so cheap credit may be harder to come by.

Serviceability assessments

Serviceability means a borrower’s ability to make their loan repayments. APRA said that ADIs should include an interest rate buffer of at least 2% above the loan product rate with a “floor” lending rate of at least 7% when assessing serviceability, whichever is higher.

Investor Impact: ADIs are likely to apply the suggested (or higher) interest rate buffer and floor when assessing serviceability. Borrowers will need to factor this (we do this as a broking service) in when working out how much they can afford to borrow.

We are now seeing lenders applying these ‘stress test’ rates to potential borrowers. Each bank has a different rate so there is some flexibility. As a broker, we do this ‘stress test analysis’ upfront before taking the application to the bank so we know it meets criteria.
— Joe Gardiner - Director of Profy Finance and Wealth

 

Increased capital requirements

Additionally on 20 July, APRA announced an increase in the amount of capital that a number of ADIs will have to set aside for certain Australian residential mortgages exposures. The change comes into effect on 1 July 2016 and impacts those ADIs accredited to use the internal ratings based (IRB) approach to credit risk.

Investor impact: Affected ADIs may look for ways to offset the increased capital requirement which may mean that discount rates may be harder to find.

Different lenders are taking different approaches to meeting the APRA guidelines, increasing the complexity of investment home loan approvals.

If you would like help in navigating lender requirements or would like to know more about how these changes could affect your personal situation, get in touch with us today.


HOW WE SUPPORT CLIENTS

At Profy Finance and Wealth, we have supported clients who are investing in property, through:

  • Helping them get clear on their objectives for the property
  • Arranging valaution reports to guide you on potential offer prices
  • Arranging home loans to access home equity for investment
  • Calculating and recommending finance options
  • Arranging fully approved finance
  • Providing Tools to assess the cashflow and return on investment for the investment property
  • Arranging value add services such as building and contents insurance, depreciation reports, and legal conveyancing at preferred prices.
  • Updating their super and life insurance via our licensed financial planning services
  • Helping them plan for any taxation outcomes

At Profy Finance and Wealth, we cover financial advice and mortgage broking to get more holistic results for our clients. Learn more about how we could help...