Getting Finance in a Tougher Lending Market
By Rich Harvey, CEO & Founder propertybuyer
If you have tried to get finance for a new property loan in recent times you will have discovered that the banks are much tighter in their assessment criteria. APRA restrictions on credit growth and more expensive interest only loans have deterred many property investors from taking the next step in buying a property. However, the APRA restrictions could be lifted soon and there any many new opportunities to secure finance in a very competitive lending environment.
I interviewed three experts in this area - Lisa Montgomery (Consumer Finance Specialist), Bessie Hassan (Money Expert, finder.com.au), David Hyman (Co-Founder and MD, Lendi) to get their perspectives on the mortgage market and how you can capitalise and take the next steps while others sit on the sidelines just watching.
1. When will APRA lift the growth restriction on the proportion of new loans to investors?
Lisa: The short answer is that it’s not likely to be soon. APRA are certainly pleased with how lenders have responded to the request – and have stated that they will be reviewing the measure at an appropriate time but have not provided an indication of when they might relax the requirement.
Bessie: At an event late last year, Wayne Byres, the chairman of the Australian Prudential Regulation Authority (APRA) highlighted concerns of household debt which suggests that it may crack down further on the growth restriction of new investor loans. According to APRA, in 2017 investor home loan debt grew by 3.65% to $539 billion, however owner occupied debt grew by 7.66% to $1,039 billion, indicating investor appetite is growing at less than half the pace of owner occupiers.
David: It’s yet to be seen when APRA will lift restrictions on new investor loans. Recently we’ve seen the lenders who are not meeting their APRA caps adjust pricing to attract a greater number of new investor loans.
2. How have investment property borrowers responded to re-pricing of interest only loans compared to P&I loans?
Lisa: Investors have taken the re-pricing of IO loans in their stride. That said, the re-pricing of existing IO loans has not been received well by investors and the broader market place. The rationale for increasing rates for existing borrowers simply doesn’t exist – and investors have reacted in a number of ways, by refinancing, requesting a discount or moving to a P&I arrangement. Property borrowers have choice and plenty of information available to understand whether their interest rate is competitive or not. And these days with the ease of refinancing – cheaper loans are available quickly and easily.
Bessie: Last year the Australian Prudential Regulation Authority (APRA) clamped down on interest-only loans, and experts and economists from the June 2017 finder.com.au RBA survey said this could mean investors have a difficult time refinancing to principal and interest (P&I) loans.
With APRA aiming to keep new interest-only loans below 30%, most panellists (57%) thought this would make refinancing hard for investors. The new rules meant investors had to jump through more hoops to qualify for finance, such as being able to show a larger deposit. Investors moving from interest-only (IO) to P&I may struggle with their new repayments as they’re not used to repaying the principal component of the loan.
This also spurred many lenders raise interest rates for investors, combined with adjusted their maximum loan-to-value ratios (LVRs) from 95% to 70% (meaning investors need to come up with at least a 30% deposit).
As a result, we may see property investors move onto P&I loans so they’re not stung with higher interest rates and stricter borrowing requirements.
David: The gap between interest rates for IO and P&I loans is up to half a percent for the majors. On the one hand we have been seeing investors, particularly on refinances and restructures, change their loan type and opt for P&I loans. And on the other hand, investors who want to retain their interest only loans are refinancing with smaller lenders who have been able to offer more competitive IO rates.
3. Will the trend to more P&I loans continue?
Lisa: Yes – I believe so. Borrowers are realising that there are benefits to P&I arrangements over and above and attractive lower interest rate. In particular those borrowers who are building a property portfolio and who currently don’t have a loan over the PPOR, are using P&I loans to build equity in concert with natural capital gain. And given that interest rates for IO loans are higher – in some instances there isn’t a great deal of disparity in the monthly repayments.
Bessie: If APRA does tighten the reins further around interest-only finance, it’s likely that the trend of investors refinancing to P&I loans may continue into the foreseeable future. This extra cost may also deter some investors from the housing market altogether, opening up opportunities for first home buyers who’ll no longer – for the short term, at least – need to compete with cashed-up investors.
David: At Lendi, we’ve seen more interest from owner occupiers shopping around to get the most competitive P&I rates available. If homeowners can afford to switch to P&I and repay their debt faster, this is something we strongly encourage and expect to continue.
4. What are the banks likely to do this year to woo back more borrowers into the property market?
Lisa: The big four banks still attract the majority of borrowers, however it is the second tier, credit unions, building societies, non-bank lenders and online players that will be offering borrowers greater incentives in the coming year. There is already a shift in borrower appetite beginning to appear in recent data. New product offerings, property share arrangements and more appealing loan products for non PAYG recipients are on the horizon.
Bessie: It is likely that we will see more banks introducing incentives such as cash-back offers, discounted rates, and waiving annual fees to try and attract new customers.
For example, CBA recently cut their investor 2 year fixed interest-only rate from 4.84% to 4.34%, while Westpac cut their comparative loan rate from 4.79% to 4.65%.
In other cases, we’ve seen some banks offer additional perks like rewards points. For instance, Virgin Money rewards home loan customers with Velocity Points for repaying their loan every month and for their loyalty every three years.
David: In recent weeks, we’ve seen some of the big banks move to bring down rates on interest only loans. There are likely to be further rate adjustments as the banks get the balance right in meeting APRA’s caps on new interest only loans. Broadly speaking, it’s set to be an interesting year with the Royal Commission which no doubt will bring about some new wins for borrowers.
5. Do you see it becoming harder or easier for borrowers to get finance during 2018?
Lisa: Over the coming year we are not likely to see any movement in official interest rates – and it’s not likely that there will be any further measures levied by the regulators. So, the outlook for property investors is fairly stable.
Bessie: Only 24.5% of new residential home loans in the year to December 2017 were interest-only, compared to 31.5% in the prior year. It seems to be proving harder for borrowers to get interest-only loans.
Arguably, everyday Australians have been the winners from the intensifying "rates war" between the major banks. Consumers are refinancing both within and between banks to capture lower rates driven by competition between the banks.
David: The banks have already started to implement new measures to assess loan applications and this trend of understanding more about the customer is likely to continue.
6. What opportunities do you see for home buyers and investors in the current market?
Lisa: As property prices stabilise in certain markets – astute buyers will find great opportunity to capitalise. If first time buyers cannot afford to buy where they work and play – purchasing an investment property as an entrée into the market is a great first step. Buying in regional or outer-lying areas that display good growth characteristics at the lower end of the market can often allow you to build equity quickly and open up opportunity and choice for the future. Areas that are in the process of gentrification or on the fringe of popular suburbs can often provide good buying – and this year as prices level – there will be enormous opportunity.
Bessie: The stable cash rate can be seen as a opportunity for Australians currently looking to buy. The cash rate remains at 1.5% and the next large move is not expected until 2019. In fact, 86% percent of experts and economists on finder.com.au RBA survey panel think when the rate eventually budges, it will be in an upward direction. This prediction of a rate rise has remained steady for nearly a year with 80 to 90% of panellists maintaining this belief over the past 11 months straight.
David: The market is very competitive right now but if you have an existing loan, don’t expect your lender to come to you with a better deal. Home buyers, owners and investors should shop around to make sure they’re getting the best deal available. The easiest way to do this is to use a home loan platform like Lendi where borrowers can compare and get advice on loan products from more than 35 lenders.
7. Are there any specific of standout mortgage products available in the mortgage market today?
Lisa: It’s interesting how many borrowers view the mortgage marketplace with confusion. And it’s understandable. In essence there are probably only a dozen standard products on offer with a variety of features plugged in. It's finding that right combination for your personal situation, a product that will suit you for this purchase and leverage you into the next – that will allow you to build equity – with low fees and good flexibility. There are some new products coming to market that will benefit investors. For example – there are new tax effective loan solutions specifically being developed for investors that have a PPOR and investment loan – where you pay a higher interest rate on your investment loan and a lower rate on your home loan. We will see more of these types of combination loans enter the market this year.
Bessie: One really sharp mortgage product currently available on the market is the Tic:Toc Live in Loan Variable Rate - Principal & Interest. It has a low 3.52% p.a. variable rate with no fees except if you choose to set up an offset account which has a $10 monthly fee but this is optional. You can borrow up to 80% of the property’s value making it a good product for Aussies who have put aside at least a 20% deposit.
David: There are some great intro and fixed rate products in the market but you really need to make sure the product features and restrictions fit your needs. If you’re paying P&I, your interest rate should start with a three and there are some really good loans available in the mid-threes today. Shop around, compare what is on offer for your borrowing needs and make sure you are not over-paying.
We’d love to help you create a sound property plan and assist you with finding your next home or investment property. Please call us today on 1300 655 615 or tell us your enquiry / wishlist today. We'd be delighted to be on your team.