The ground is shifting for borrowers and investors in the property market as the banking sector tightens lending standards, says People’s Choice Spokesperson Stuart Symons.
“We’ve entered a new phase which will have repercussions for investors and owner-occupiers alike. There’s a greater focus on responsible lending, which is an approach People’s Choice has always taken. That’s not a bad thing – the underlying concern is that all debt is affordable and sustainable for the borrower,” Mr Symons said.
“With APRA twice signalling its intention to promote better lending practices and reduce household debt, borrowers can expect more changes and more checks on lending but investors can help their chances with a little homework.”
Mr Symons said APRA’s 10% cap on annual growth in lending to investors and its 30% cap on new interest-only lending last year had slowed investment lending in every state, but the focus on serviceability and the management of debt levels was leading to smarter lending.
“While the cap has been lifted for some financial institutions, there is now a greater emphasis on better understanding borrowers’ actual expenditure when assessing loan applications and factoring in how applicants will cope with future rate increases,” Mr Symons said.
“Borrowers can still borrow, but there is a greater focus on assessing serviceability and managing overall debt levels.
“Limits to interest-only lending targeted investors and owner-occupiers alike which highlights the importance they now place on paying down household debt rather than banking on capital growth for a return. That’s one reason for such a significant change throughout the industry.”
Mr Symons said borrowers can be prepared by:
1. Having close control over spending and income
“Know what you spend, where, when and why. A budgeting app can help you manage your money, track your expenses, give you greater control and provide visibility for when you approach your lender. It will also help you outline the spending that you can drop if interest rates increase,” Mr Symons said.
“Lenders are committed to responsible lending – and that can only occur with the benefit of good data and a frank conversation. A good lender will help you towards what it manageable rather than trying to push the highest loan amount.”
2. Understand how you can prove your savings habit
“Saying you can save will never carry as much weight with a lender as proving you can save. There is a much more powerful argument to be made when you can show genuine and verifiable savings,” Mr Symons said.
“This is especially true when it comes to interest-only lending. Lenders are concerned about how a borrower will cope with higher rates. If you can show a savings discipline, then you are effectively showing you are prepared for the potential for higher rates around the corner.”
3. Be clear about your investment intentions
“Having a detailed investment plan which shows how you propose to meet your long-term and short-term goals testifies to potential future income and the feasibility of your plan – things that a lender will take heart from,” Mr Symons said.
“Ideally, this is work you have already done to better understand the investment opportunity you are considering, but if not, talk with your lender or financial planner about the sort of information that might be useful. Your lender isn’t an investment advisor, but they can talk about how income from your investment is likely to be assessed from a serviceability perspective.”
4. Expect speed bumps
“Changes in circumstances and unexpected situations do happen, as do interest rate hikes. It helps if you can show that you have considered these possibilities and can show what plans you have to meet those challenges,” Mr Symons said.
“Always think about where additional cash might come from: a pay rise, a bonus, sale of unwanted assets and tax refunds.”
5. Be realistic
“If you’re putting forward numbers that make you squeamish, chances are your lender will feel the same. Be realistic to give yourself the breathing space you will need,” Mr Symons said.
“After all, an investment is a long-term proposition – everyone should be looking beyond day one of the proposition.”