There has been much talk over the past few months in regards to the regulatory changes the Australian Prudential Regulation Authority (APRA) announced they would be introducing in regards to residential mortgage lending. These new measures will be industry-wide and apply to all lenders, and potentially all property investment loans as well.

So how exactly will these changes impact you and your investments?

What Are The APRA Changes?

The main focus of the changes that APRA announced in March 2017 is for lenders to limit interest-only lending to 30% of all new residential lending. As a result of this new limit, lenders will be required to:

• Reduce the volume of interest-only lending at loan-to-value ratios (LVRs) above 80% (In other words, if you are borrowing more than 80% of the value of the property)
• Restrict interest-only lending at an LVR of 90% or more
• Remain below the advised benchmark of 10% growth
• Ensure that serviceability metrics, including interest rate and net income buffers, are set at appropriate levels for current conditions
• Continue to restrain lending growth in higher risk segments of the portfolio, such as high loan-to-income loans, high LVR loans and loans for very long terms.

Why Are They Happening?

The APRA introduced these new regulations in an effort to curb investor borrowing. It’s just one part of an ongoing response to what APRA has described as an environment of high housing prices, continually rising levels of household debt, slower income growth, and historically low-interest rates. While it’s yet to be established, there is also some concern that the high demand from investors in areas such as Melbourne and Sydney are pushing prices higher and higher, making it difficult for ‘non-investors’ such as families and first-home buyers to get their foot in the door. Currently, lending on interest-only terms represents around 40% of the stock of residential mortgage lending, a figure that is quite high by international and historical standards.

What Does It Mean For You?

As a result of the new APRA requirements, banks and other lenders have changed their requirements around investor lending. This could potentially make it harder for would-be investors to secure finance for their investment. Whether you’re a current investor or a future investor, you can expect to see some changes.

How does this affect existing Investors?

Unless your investment loan is already on a fixed-rate, you will likely see a slight increase in interest rates in line with the APRA’s requests to lenders. When looking to add to your portfolio, expect to be challenged by tougher serviceability requirements as well. As long as you have good equity and strong incomes, there’s no need to worry too much as lenders will still be willing to provide finance.

The main issue current investors will come across is for those with a multi-property portfolio looking to release some equity. While the interest-only rates sit at around 4.5-5% p.a, some lenders may now assess your ability to service loans on the entire portfolio at a higher interest rate (along the lines of 7.5% p.a) with principal and interest repayments. Unfortunately, it’s likely that these new requirements will make it increasingly difficult for investors looking to refinance and grow their portfolios.

How does this affect New Investors?

As a new investor, the APRA changes will mean you now have more hoops to jump through when looking to get finance for an investment property. A few things to keep in mind are:

• As lenders tighten the requirements, you should expect greater scrutiny of your ability to service or repay your loan. Many lenders have standardised and increased the minimum benchmarks for loan affordability, which could mean your borrowing capacity is reduced.
• While in the past lenders may have assessed your eligibility by looking at your existing debts and your actual repayments, you can expect moving forward they will be looking for a greater capacity. Instead of assessing your ability to meet interest-only repayments, they are now likely to also assess your ability to meet principal repayments, whilst figuring in much higher interest rates.
• Lenders will be reducing the amount of rental income the will consider when assessing serviceability. Expect to only have around 80% or lower assessed, and also be aware that they may restrict or remove negative gearing considerations as well.
• The type and location of your investment has never mattered more when it comes to getting finance. Some lenders may baulk at residential unit developments, whilst others may have preferred postcodes.
• Not only are lenders scaling back on interest-only loans, they are also increasing investment loans to rates higher than your standard home loan.

Moving forward, APRA has announced they will “continue to observe conditions in the residential mortgage lending market, and may adjust the above measures, or implement additional ones, should circumstances warrant it” so investors should stay on their toes and keep an eye on changes. Securing a home loan can be challenging at the best of times, but with these new changes, it may be worth it to invest in a broker who can help you navigate the process.

Remember to shop around and get the best value and the best interest rates on offer. With the new changes to interest-only loans, you may be better off going for a P&I loan which on average sits at around 0.5% lower than interest-only anyway.

So if you’re looking to invest but aren’t quite sure how to get started The Edge Property Buyers are here to help, book a free 30-minute consultation with us today!