What do the APRA changes mean for WA property investors?
As you may have heard, the Australian Prudential Regulation Authority (APRA) has indicated it may change its guidelines regarding investment lending policies.
Due to these proposed APRA amendments, these changes will affect property investors as detailed in the Prudential Practice Guide APG 223 Residential Mortgage Lending policy. These potential interventions may directly influence property investment loans.
In this article, we will determine what these changes mean for WA property investors.
What caused this potential intervention?
APRA’s mandate as the independent statutory authority that supervises institutions across banking and insurance authorises it to promote financial system stability in Australia. Taking the previous year’s unprecedented events into account, it released its policy and supervision priorities to mitigate any risks in Australia’s financial sector.
Among its list of priorities, APRA stated that it would concentrate on maintaining financial system resilience through increased action on crisis readiness, including recovery and resolution planning and stress testing.
Rising housing prices
One of the core reasons for its amendments to investment lending stems from rising risks identified in the property lending sector. Rising house prices have resulted in APRA threatening to intervene and cool down the property sector from overheating.
With Australian house prices rising by an incredible 2.1 per cent in February 2021 and new mortgage lending in January growing at its fastest pace on record, APRA may force banks to reduce their higher-risk mortgage lending.
The core objective of any APRA intervention is to put measures in place to focus on responsible lending practices. However, APRA may also intervene to slow the exponential rise in property prices by implementing restrictive lending policies. With high demand pushing up prices, non-investors and first-time home buyers cannot afford to purchase homes.
By increasing the restrictions on investment loan lending, APRA’s intervention would aim to bring down housing prices and increase the affordability for the owner-occupier market.
Increasing household debt
Of additional concern to APRA is rising household debt. With this crucial market indicator showing a mortgage debt surge that could breach an acceptable threshold, the regulator could use its tools to tighten lending standards to address this economic red flag.
Very low interest rates and increasing house prices can create a catalyst that motivates households to take on higher debt levels. As a result, banks seeking to accommodate this demand may increase their acceptable risk thresholds.
The challenge with this scenario is the potential rise in interest rates in the future. As investment property financing is a long-term liability, households run the risk of paying larger interest payments which could cause financial distress for many.
Furthermore, with high loan-to-value and high debt-to-income ratios increasing, property investors may find it harder to secure loans as banks tighten lending criteria in line with APRAs interventions.
What could APRA do?
In 2014, APRA intervened in a similar fashion, forcing banks to curb their lending to property investors.
In 2017, they followed this intervention with a crackdown on interest-only loans.
If we consider these past actions, any potential APRA policies would most likely follow the same format. For example, they could call for banks to hold more liquidity as a buffer against their growing mortgage books and set a limit for investor lending growth.
By calling for these policy changes, APRA’s intervention may force banks to respond with the following measures.
The most apparent change banks could make to meet the prudent fiscal targets APRA sets is to make changes to their investment mortgage interest rates. For instance, they could increase the interest rates for investment loans and tighten down their negative gearing concessions.
However, this change would have a multiplying effect on the market. As it increases the expense and simultaneously discounts any potential investment property income, it could increase the cost of an investor loan considerably.
Assess existing debt
Another change banks could make to meet the potential APRA intervention is to reassess their existing debt threshold criteria. For instance, lenders may look past affordability based on interest-only repayments exclusively. Instead, they assess an individual’s existing debt using both interest and capital repayments.
For example, if a borrower is paying off their existing debt at 4 per cent with interest-only payments. The lending financial institution will increase their assessment rate to 8 per cent by including their capital investment repayment rate.
This change affects investors with large portfolios. Banks assessing debt on both capital repayment and interest could result in the lender determining that the borrower cannot service any more debt using this assessment calculation.
Another measure banks could take to meet the prudent policy changes is the way in which they measure household expenditure. For instance, they can standardise or even increase the minimum benchmarks for affordability.
This threshold change means banks will measure someone living prudently with minimal monthly expenses in the same way they assess someone servicing a higher cost of living.
So, for example, if one individual lives at home, they will be considered the same as someone who lives independently and needs to pay monthly expenses such as rent and utilities.
Discounting rental income
Banks assess an individual’s ability to repay any loan based on their income and expenses. Another measure they can implement is discounting the amount of rental income they use in their affordability calculation.
By taking this approach, they effectively decrease the individual’s net income, an amount used to determine if they can repay a loan. For instance, if they only consider 75% of rental income in assessing loan repayment serviceability, the effect could have a material impact on a potential lender’s application.
The net effect
Suppose we combine this discounted rental approach with the higher interest rates, increase in debt repayment assessments, and higher thresholds for baseline living expenses.
In that case, the net effect could price many potential investors out of the market. Based on these possible scenarios, what can property investors do in light of these tightening fiscal measures?
What should property investors do?
APRA’s potential interventions are a direct result of the booming property market. With prices increasing, there is no better time to buy an investment property. However, any changes to the financial lending market could have an impact on you and your property investment.
Nevertheless, any potential amendments should not deter you from seeking your financial freedom and growing your property portfolio. What you need is the right property finance solution and a trusted partner to walk the road with you.
Finding the right investment property solution
With imminent changes to the property investment lending market, finding a mortgage that meets your financial goals and repayment objectives is now more crucial than ever.
Property investors need to conduct the relevant research and factor in elements such as timing, their borrowing and repayment capacity, and ultimately their investment property strategy. However, the most crucial factor is identifying a financial institution that will support and underwrite your lending requirements.
This lending support is vital, and investors must resist the temptation of going with the financial institution that offers the lowest interest rates. Instead, finding and applying to a lender that will allow you to build your portfolio is a far better option.
Enlist the services of a mortgage broker
However, the nuances involved with finding the right lender and submitting the appropriate documentation can be challenging. Therefore, before starting your application process, enlist the help of an experienced mortgage broker.
Since they specialise in this area of finance, they can help you weigh up the pros and cons of the various financial institutions and what they have to offer. They also help you broker a better deal as they have relevant relationships with multiple banks.
However, the mortgage broker’s services should not end once your investment property loan has been approved. Instead, they should frequently review your portfolio with you and advise on the best course of action should anything change.
Consider the ongoing management of your property.
Once you have secured your investment loan and purchased your property, it is vital that you manage your asset to ensure its value appreciates. In addition, with APRA’s possible intervention driving housing prices down in the short to medium term, you need your investment portfolio to meet its financial objectives.
Finding the right property manager to help you manage your property can aid you in protecting your investment.
Ideally, they should have a proven track record and understand the nuances of managing property in your investment’s location. They should also offer services such as day-to-day property management and include inspections and maintenance management as part of their service.
Ready to talk about how these changes may affect your circumstances?
If you want to discuss how to assess leading property finance solutions to find the right solution for your circumstances and goals, as well as a property manager that knows how to accelerate your return on investment, we would love to help.
HERE Property is Perth’s leading provider with almost 40 years of experience in the Perth market. Our expert team is 100% focused on simple, smart, and proactive property solutions.
Visit our HERE Finance service page and contact us to understand the right property finance solution for your investment needs.
The information provided here is for general education purposes only and is not intended to constitute specialist or personal advice. It has been prepared without taking into account your objectives, financial situation or needs. Specific investment advice should be obtained from a suitably qualified professional before adopting any investment strategy.