The Australian Prudential Regulation Authority (APRA) recently issued a directive to the banks to tighten up investment lending. Responsible for upholding standards of trade in the financial industry, APRA had become concerned about the number of people entering the investment lending space and the sustainability of this sector given current economic circumstances. That is, activity in investment loans as a percentage of new housing loans had become disproportionately high. A fact borne out by the NSW case where, until recently, investment lending accounted for some 50% of all new lending.
The bank reaction
The banks have been given a target of 10% maximum growth in residential investment lending per annum. To achieve this, they have cut the discounts usually on offer to property investors. That is, interest rates available to property investors have increased. The focus has also switched to Loan-to-value ratios (LVR) with the likelihood that LVR maximums will decrease to around 80% for property investors.
Serviceability is also expected to become tighter. That is, could a potential applicant afford the loan if rates rose to 7.5% pa? Negative gearing concessions may also be removed from serviceability calculations. That is, ignoring the tax benefit gained from negative gearing when calculating affordability.
The net result is larger deposits and more capacity to service the debt will become the norm. This is not necessarily a bad thing at all.
Non-ADI lending advantage
The APRA directive was aimed at Authorised Depository Institutions (ADI). That is, institutions that are authorised to take deposits. Most people think of the Big 4 banks when talking about ADIs. In fact the Big 4 are quite aligned with the 10% maximum growth that APRA is stipulating. Many other ADIs will be targeted even further and have to reign in their investment lending activities.
The advantage is for those lenders that are not ADIs as they are able to grow their loan books as they see fit. This doesn’t mean that they will open up the cheque book and be loose with their standards, but if they already have maintained a responsible balance between investment and non-investment loans they may now have a slight competitive advantage.
Moneybright and Investment Loans
Our no-commission model offers property investors access to some very good loans with low rates. At the time of writing, investment loans as low as 3.84% pa (comparison^) are available. If looking for an investment loan then feel free to call or contact us via email.