Important changes in the investment lending market
Written by David Lennox
So, an honest show of hands. Until recently, who had heard of APRA? Better still, who knew what the letters stand for and what APRA do for all of us?
If you knew, you get a smile and a pat on the back from marketing. If you still don’t know the answers by now, then this piece is definitely for you.
My mum always said the day I wrote a blog about a regulatory authority is the day that I am taking work too seriously and I need to get out a lot more!
I agree with her and this piece (I’m not calling it a blog) sails close to the line. But instead of it being a blog, I am doing a bit of an FAQ. But it isn’t an FAQ because people haven’t asked me these questions at all – it is more of a TYNK (Things You Need to Know). It rhymes with THINK, so I am pretty happy with the concept.
Why am I telling you about APRA? (stay awake please)
APRA have imposed new measures on lenders which impacts how they lend you money.
If you have investment loans or want to borrow money, this means it will likely impact you. The changes we have seen in the last few months are quite significant. I have not seen such sudden changes to bank policies and interest rate settings in the 15 years we have been in business.
Who is APRA?
The Australian Prudential Regulation Authority (APRA) is a statutory authority of the Australian Government and the prudential regulator of the Australian financial services industry
What does APRA do?
APRA oversees lenders and other institutions such as insurers, fund managers, and the superannuation industry, etc. For a detailed explanation CLICK HERE . In short, for the purposes of our industry, they make sure lenders play by the rules AND that when lenders make financial commitments to us, it is done so within a stable, efficient and competitive system.
I particularly like reading about APRA’s values “…we play a critical role in protecting the financial well-being of the Australian community..’ Basically, they are there to protect us consumers and ensure we have a stable, sustainable financial services system. That is a good thing, right?
Why has APRA been in the news?
In December 2014, APRA sent a communique to APRA on lenders outlining steps to reinforce sound residential mortgage lending practices (APRA media release for the full statement). One of their recommendations was directed towards growth in lending for property investment. APRA suggested “growth above 10% pa will be an important risk indicator in considering the need for further action”.
Why has APRA done this?
A big percentage of Australian property investors live in Sydney and Melbourne. Residential property in those markets have recorded solid growth over the past 12-18 months. Additionally, interest rates have been very low. This leads us to a very simple equation…
- High Property Value + Low rates = strong borrowing conditions
- Strong borrowing conditions = investors buy more property
- In simple terms, they are requiring lenders to exercise caution with how much they lend for investment.
And this is what has been happening (together with the growth in purchasing by overseas investors).
Investment lending had been growing at over 20% pa and this is seen as unsustainable and could lead to issues when interest rates eventually started rising (and property prices in some markets flattened.
APRA needs to see heat taken out of the investment lending market.
How have lenders responded?
Each lender has approached this APRA-led change differently.
- Some lenders have stopped offering discounts on new investment loans
- Some lenders have increased rates on EXISTING investment loans or interest only loans
- Some lenders have reduced the Loan to Value Ratio for investment loans (ie, the % of the property price that they will lend)
- Some lenders have stopped investment lending
- Some lenders have changed how they assess NEW loans by applying higher interest rate buffers to new and existing loans OR by removing / reducing the impact of negative gearing benefits
- Some lenders have not made any changes at all
What does this mean for you?
The lending market has become more complicated as there is now more diversity of policy and risk appetite among lenders. However, lending conditions are still OK and Australia still has a very competitive lending landscape.
This emphasises why most Australians now choose a mortgage broker to look after them.
Vision is working overtime to ensure it stays on top of all these changes as they are announced and as they ‘wash through’ the marketplace.
Should you wish to know how your bank has responded to these changes and how it may impact your lending portfolio it may be a good time to review your lending arrangements. We at Vision Property & Finance walk with you every step of the way and want to see you make sound financial decisions for now and your future and would like to invite you to meet with us to discuss these changes should and review your loan.
You can contact us here we will call you.
About the writer: Dave founded Vision with Matt Ivers in 2000. He oversees the strategic direction of Vision Property & Finance and ensures that systems are in place to support mortgage brokers and the admin team. He has nearly 25 years experience in the mortgage broker and finance business, and is a trusted credit advisor to hundreds of happy customers. Make contact with Dave at email@example.com.