Bank West set to stop using negative gearing benefits to calculate loan limit

Here is next bigone

BankWest set to axe negative gearing tax breaks

Serviceability calculator amendment

The bank is expected to introduce the changes at 8pm (AEDT) by amending serviceability calculators used by mortgage brokers to assess loan eligibility. It will apply to all new loan applications and existing loans that require "reassessment" when banks review and adjust downwards pre-approved or issued loan balances.


CBA, which last week followed Bankwest's decision to pull property investor loans, is widely expected to replicate the decision.

"This potentially has huge implications for property investors and borrowers because of investors' tendency to rely on negative gearing," said Mark Chapman, a director of tax accountants H&R Block.

A confidential Bankwest memo said the changes were targeting borrowers that run investment properties at a loss.

"Where the income of the investment property does not exceed the costs, the related taxable benefit will no longer be included in BankWest's calculation for serviceability of the loan," it states.


That means it will lower borrowing capacity but not Australian Taxation Office deductions that can be made at the end of the tax year, such as council rates, owners' corporations and maintenance.

For example, a property investor paying the top tax rate of 49 per cent has a $1 million loan at 5 per cent interest, or about $50,000 a year.



Read more at link above

 

Just as well we don't rely on negative gearing ..

Cliff

 

Ordinarily this would be a big deal, but they have withdrawn from INV lending already.... and just quietly, Bankwest were already at the absolute bottom of the list for servicing anyway.

Also keep in mind - Westpac removed neg gearing and reduced their LVR's when they wanted to address their problem with the APRA I/O speed limits. Eventually they returned. AMP withdrew from INV lending completely, when they wanted to address their problem with the APRA I/O speed limits. Eventually they returned.

This is how it will be , now. Lenders will detune their calcs and their pricing when they want to turn the taps off for INV lending, and do the opposite when they want to get some quick volume in. Just look at Westpacs servicing calc now.... its ultra sharp again. When brokers realise it, they will get a lot of business, reach their speed limits and then turn it off.

 

it's reported nab decreased the calculated rate to 7.25% recently....

 

It is pretty interesting - I'm not so sure its intended.

We have a game of musical chairs when it comes to credit policy. @euro73 spot on, banks are turning policy levers to adjust the drip of investment lending.

While banks have tightened the nose, others are adjusting and tinkering to make their calculators a little more positive.

It would usually make sense to use pricing to do this, solely as a measure of adjusting volume. But with APRA influenced changes, it appears to be temporary policy measures that are also being used.

It does lead to policy uncertainty for investors finance plans - which does make it difficult to accurately plan finances ahead. E.g. CBA removing negative gearing would impact quite a few land owners who plan on doing the build in a few months time.

Adds weight to using an 80% LVR approach - in times of uncertainty, having flexibility is key.

 

Surely Euro this will put the brakes on property???? NO finance NO buying???

Am I missing something?

 

All these changes all point to curbs on loan churning. The days of borrowers running around refinancing existing loans and extracting equity and improved servicing and drawing equity, seeking IO deals etc appear to be on APRAs radar.

IMO this is stage I - APRA would have to be putting other lenders on notice not to fill the gap. Start with the big 4 and wave a stick at the smaller players. If they fill the gap - squeeze them.

Its doesnt end negative gearing or property investment. It ends the leverage on leveraged debt funded by using more debt linked income. Those with high incomes wont be badly affected. Those with other cashflow +ve property and sources of income wont be affected.

That said its very hard to find a deal that is cashflow neutral when yields are lower than interest rates. So only those with strong cashflow need apply

QUESTION : Does a PAYG variation bypass this measure ?? A new investor cant use it but existing investors may be able to get a variation then demonstrate low tax withholding at the time of approval. So rather than the bank calculation factor in the tax benefit the actual taxpayer plans it now so that actual paylips show more disposable income. example : Dave has a existing property that is neg geared and produced $12K of tax refund a year. Rather than wait to year end he seek a variation now and he can then demonstrate actual cashflow from net wages that is $12K better.

 

They will query the variation and then exclude - reverting it back to the base gross/net so that won't assist as a workaround unfortunately.

I wouldn't necessarily say it's purposely designed the target against debt reshuffling to minimising the impacts from APRA - as those putting these policy changes are largely not the higher end capacity lenders.

Across the board those who APRA can target are and there is a significant levelling of the servicing structure front between what was the gap between highest and lowest servicing calculators. Meanwhile the lenders which fall out of the grasp of APRA's levers continue to gain market share and offering more aggressive borrowing models.

 

Indeed. And with Bankwest the smaller brand of CBA, maybe CBA and sone other banks will follow.
Who cares about negative gearing. We invest for cashflow ( and CG is a bonus).

 

They were using 7.4% for existing NAB debt ( that includes nab, ubank, homeside) and actuals + 30% for OFI debt. That was changed to 7.40% across the board late in 2016, and slightly reduced to 7.25% across the board, recently. The reduction from 7.4% to 7.25% doesn't make much difference

 

Bankwest were useless for investors....so their non participation in lending to investors is not going to have any impact . One might assume that if CBA did this sort of thing - different story, but then again...not really. Remember that Westpac and STG, BankSA, Bank of Melbourne - who are a much bigger aggregate lender group to investors than CBA/Bankwest- did this for a long time after APRA, and it didnt stop investors finding money elsewhere. You really need all the Big 4 to do this simultaneously for it to even start to have an effect. Even then, borrowers would just migrate to 2nd tiers and non banks anyway.... but eventually, when all the B plans and C plans have run their course, then you'll see the impact really start to take hold.

In my view, APRA is trying to engineer a mass migration from I/O to P&I , over 4 or 5 years. We are only 2 years into the process... I have said since inception that by late 2017 you'd start to see the real pain begin, as we go past the tipping point where more than 50% of those who were I/O pre APRA , start reaching the end of their 5 year I/O terms, and are forced to be re-assessed for renewal. I believe extensions to I/O terms will be rare as hens teeth , forcing masses of refinances -if borrowing capacity permits - which will only eat up other lenders 10% speed limits more quickly, leading to more lenders saying no to bank/ refinanced I/O business .... and that's when the first real volume of migration to P&I will start.

When we start to see large numbers of investors being forced to P&I by late 2017/early 2018, their repayments will start becoming very challenging, very quickly - especially if BASEL IV has started pushing rates up another 30-40bpts and they haven't got 1 or 2 cash cows in the mix which can do the heavy lifting for them. Under those circumstances we will start to see some people really struggle to hold on - especially those who have ignored the warnings and continued to chase growth at the expense of cash flow. By late 2018 and into 2019 this will likely start to catch a lot of investors out , will really take hold and I would imagine that if there hasnt been some RBA relief by then, plenty of investors will have to offload properties they just cant afford to hold on to at rates approaching 5% P&I. This will see growth slow to a crawl, or possibly even a correction.

Of course, If the rumoured 8.75% assessment rates are introduced , I would think that will do the trick with pulling borrowing power back quite a bit sooner.

The question is, does APRA went to wait 2 more years for their changes to take effect, or will the RBA quietly be pushing them to turn the screws far sooner so they can drop the cash rate without house prices surging?

 

I can't see how brokers are going to survive this.

 

Brokers who understand servicing calculators will likely thrive - you are forgetting how hopeless most bank lending staff are.

But brokers who can work with their clients on debt reduction strategies will really thrive

 

No ....

CG is where you make your money and the more cash flow you have the more you can hold so the more CG you make .

Cliff

 

I don't think its the end of good brokers.

 

Macquarie are also making a few modest changes... I suspect the first of many who are about to make I/O tougher to obtain, and also the first of many who will start asking for quite detailed living costs to be broken down.

Its getting to the point where brokers are taking on quite a lot more compliance work for the regulators and for the banks, and may need to start charging a fee for it .

 

OK now you've gone too far

 

I'm pretty sure DHS would be onto us is we treated childcare as discretionary and decided to leave the kids at home to fend for themselves.
I wonder, can we leave the investment property expenses out as I don't pay for them the tenant does.

 

Are we talking about IO on IPs or all IO including PPOR?

 

Ha. Possibly. That being said, the amount of compliance work required before a loan can even be submitted, has multiplied many times over in the past 12 months, and if the ASIC review of remuneration goes how I think it will go, I believe even more compliance is coming. Its not so crazy to believe that increased costs to a business are passed on