APRA changes and large existing portfolio of properties

Hi all.. I have been reading about APRA changes in the last few months. Whilst I am not at that stage yet, I was wondering as to how they are actually affecting the existing investors on the forum who have larger portfolio of properties (say $2.5m or more) and if they had to make any changes in the portfolio/ future strategy/ loans as a result of the recent APRA tightening. Any insights for the newer investors (and PPOR owners) who may hit those caps in near future will help.

 

I've got quite a few clients who have been affected by this. Their existing lenders wouldn't give them today what they were willing to give a few years ago. These investors have the following options:

* Sit tight and do nothing.
* Sell some properties to reduce debts.
* Use lenders that fall outside of APRA regulation such as Liberty.
* Look for ways to make money that don't include borrowing.

The first isn't an entirely bad option. You're not moving forward, but you're not going backwards either. When they can come back into the market (due to income increases and paying down some debt) they'll often find themselves with a lot of equity. It can be difficult if interest only periods are expiring.

Selling some properties to consolidate the portfolio can be useful. Realise the profits from the properties that aren't expected to perform in the medium term. Pay down some debt, then get back into the game. The answer in this path will be different for everyone.

Liberty charges about 1% higher than other lenders for some loans, but they'll lend significantly more. The problem is if you want to release equity, you may find yourself having to refinance cheap loans into expensive ones, as well as expensive loans for any new properties. Some are opting to take this path, many aren't. There's not answer that fits everyone here either.

Property investment isn't the only way to gain financial independance. A successful business can generate cash flow and may be an asset you can sell for a profit later in life. It may even have enough cash flow to overcome serviceability limitations. It can also be risky. Investment in share and other markets can also be helpful.

 

Ive sold 3 properties and kept the debt level the same used the proceeds to invest in the share market and put a deposit on a type of property I can get a loan for, a combine harvester.

 

I wouldn't say I have a large portfolio of properties but I met your criteria (>$2.5m or more). I'm fortunate in that I have a higher income which is borderline for the new serviceability restrictions but have over the past year managed to refinance all my IO loans to extend the interest only periods.

Somewhat in conflict to this I have moved about half my loans voluntarily to P&I to reduce rates and to ensure I don't have all my loans coming off IO periods at the same time (I don't have any non-deductible debt to worry about).

I've also fixed the rates on a few of them for 2-3 years on pretty good rates.

Any additional investments have also been more cashflow focused (commercial property through unlisted property trusts, shares, p2p loans).

Regardsm

Jason

 

By selling down you mean?

 

or by taking payments from super before retirement age?

 

Is that $2.5m pa net of expenses and interest or gross rental before expenses ?

 

lol, that would be nice, but I took it to mean capital value.

 

well summarised @Peter_Tersteeg

for many ppl, "siting tight and do nothing" isn't an option due to the significant increases in the PI repayments. "selling down some IPs" + " increase income" might be a more realistic approach for many + diversification into other asset ( share ...)

 

What about using lenders such as Liberty? One of my loans has gone to P & I after 10 years of interest only with NAB. I realise that the interest rate is higher but the payments are still about $500 less a month than if go P & I.

 

Liberty is an option if you still want to keep the IO repayment option. ( and likely it is the last option)

 

Sooner or later, you're going to have to pay P&I. Switching lenders is becoming more and more restrictive in this way, some lenders are even refusing to refinance a loan to another I/O facility.

From a certain perspective, this is quite logical. One of the more legitimate reasons for having an I/O loan is to save cash flow and redirect those funds towards paying off non-deductible debt. When people say they can't afford P&I repayments, clearly they haven't been paying off that non-deductible debt, usually spending it on lifestyle instead.

Okay, that might not be true, but that's what a lender might see.

If you refinance to a new I/O loan, you're only going to have this question arise again in 5 years. That might be valid if you have a strategy in place now to deal with this, but if this property is a long term buy-and-hold, then perhaps the better strategy is:
A) Refinance to reset the loan term to 30 years so the ongoing payments are more manageable.
B) Make P&I repayments over that 30 years. It may be harder now, but it does save a lot of money in the long run.

 

We’ve done the following .

Sold two nice but non essential properties that were responsible for around about 50% of our negative cash flow. We’re already really noticing the impact of this on a daily basis . Just not having to dip into income to top things up so more money for us .

Within our super we’ve sold our two properties in Sydney , taken profit and have enough funds to pay the rest down . We’re about to have a meeting with our accountant to discuss options . We debated buying another in Hobart , but thought having the extra cash buffer was more important at the moment . We’re at that transition to retirement phase so we can access extra money if we need it .

Doing due dilligance on a granny flat for the back yard of our PPOR . Had one company around on Monday morning and seeing another this Saturday morning Have funds in LOC to do this so don’t need to borrow .

Doing work on our weekender with a view to renting it out so hopefully that should be ready to go by this summer .

We’re monitoring our spending on a close basis and that has also made a difference .

We’ve reviewed our loans and can extend the I/O terms on some loans but haven’t done that yet. Given our amount of debt , can’t really refinance unless we go with second tier borrowers and we decided not to do that at this stage .

We have one loan on a block of four units ( one title - hobart ) which goes P&I late next year . Once we’ve done the granny flat we’re going to subdivide those so we have more options . It’s the one IP we have a significant amount of equity in , so we might do something like sell one to pay the rest off , or we could sell them all off individually and use that to pay down other IP’s .

So far the powerball option hasn’t come off , though it’s up to 40 mill this week .

Also SWMBO is doing some part time work .

Cliff

 

My strategy is to have interest only until I retire which is only 3 or 4 years away. At that point, I'll probably start selling down my properties. At the moment, interest only is available for only 5 years but anything can happen between now and then. I've had interest only for 10 years for all my properties so far so let's see what happens in 5 years time.

 

Currently selling (mostly sold all 4 over last 3 years) everything as IP's we had were caught up in the recent Syd hype (Central Coast) so great time to sell them.
Just got current PPOR to go, and a contract is imminent any minute for that, then heading for a quieter, more relaxed life nearer to the coast on some acres.
No more worries about banks, int rates, jumping thru hoops.

Timing is good IMO.

Shall leave the next generation(s) to work it all out, and they most certainly will IMO because we (yep, all you lot and us) are here for them with experience to keep them focussed and stay the line on property investing.

Looking for some part time work now and lazy daze in between.
Delayed gratification here we come!

 

Having no expertise in finance.
I've noticed that every time the end of a boom when property prices seem to get out of hand, the government intervenes in some way.
This time it was the apras actions

The last time it was removal/reduction of lo/no docs plus tightening of finances.

Am I right in this pattern?

 

+1 for Sitting and doing nothing on $2.5mil. Maybe fix some loans at lower rates or give in to banks efforts to get me off IO on some loans if the numbers are nice and start with 3.

Kinda saw that lax lending wont last forever and Milked the banks for all the extra borrowing during refinances. Excess funds are in the PPOR offset with overflow and salary savings going to the highest rate investment loan. Paying down ppor as quickly as possible while doing nothing proactive isnt too bad.