Do you still have borrowing capacity?

Technically that's a point I'll concede Dave, but at the coalface of a calculator and a 7.4% assessment rate , unless its $hundreds extra per week, it's impact will be zero for most investors at the majority of lenders

To improve the property, he's first got to be able to access funds. if he doesnt have any capacity left, it's a horse v cart or chicken v egg debate... and round and round it goes

But ultimately, the point I'm making more broadly is this - if an investor has built a portfolio using lenders who serviced previously at "actuals" and is now faced with buffers, this is a very quick example of the impact;

Lets say I have $1 Million with ANZ or CBA or XYZ bank at 5% I/O . lets also say I am out of capacity with all of them, so I go to NAB, who until a few weeks ago, would have been one of the logical choices for this sort of situation due to their policy of accepting non NAB debt at "actual" rates. In this scenario , until a few weeks ago NAB considered that my $1Million of I/O debt cost me 50K per annum to service ( $1 million x 5% ) Now though, they consider it costs me 74K per annum ( $1 million x 7.4% assessment rate ) The reduction in my capacity is immediate and severe. And except for 3 or 4 lenders still accepting "actuals" , that is now the way every lender treats all debt, for everyone. To illustrate further. NAB ( like most) only accept 80% of rent as income for servicing, so I would need to have increased my rent by @ 30K per year in this scenario just to recover the 24K I lost to the new servicing policies. Result - 30K additional rental income equates to 24K of useable income, which only brings me back to my previous level of borrowing capacity, pre APRA changes. I have generated ZERO additional capacity.

Now, I could go to Pepper, FM or Homeloans or P&N in WA - and their policies will let me go after a few more deals... but their appetite's are very vanilla ( except pepper) and they wont have the capacity to take all the business that cant get past a servicing wall at the banks. So for some investors this will allow them to kick the can down the road a ways, but eventually they will end up out of puff there as well.

Point is, most investors will find it more and more difficult to find capacity, and rental increases from renovations will not go within a bulls roar of closing the gap in most cases. There will of course be exceptions but as a general rule the impact of rental increases will be dwarfed by the impact of APRA's changes.

And round we come to why I love NRAS.... aggressive debt reduction accelerant at work , creating equity even in a flat market, and removing debt , resulting in improved borrowing capacity in the medium term and long term.... But that's another story

 

Borrowing is fine but no deposit as 3 IP's are restricted to 80% LVR.

Currently moving 1 of those IP's to another bank so I'll have my next deposit.
LVR staying 80% due to better valuation

 

Agree with you sash that it'll likely take some steam out - i suspect this is APRA at the beginning of a well mapped out tightening response to.

Nonetheless, for now, borrowing power can still be worked around for those who really want it. The changes will bring in line the majority though. How much longer workarounds are available is debatable and crystal ball gazing at best.

Deposits and LVRs to be targeted next i suspect.

Cheers,
Redom

 

I was trying to say this same thing, but you explained it way more clearly. Thanks

 

Fear tactics everywhere.

 

But unfortunately its a real thing. I found a house I wanted. Great. With NAB, was supposed to borrow 400k. (Before changes in policies I was told borrowing something like 530k was possible, but anyway, I assumed borrowing 400k would be a piece of cake).

Apparently due to material differences in the application from when it was first presented to the bank to when it came time to submit, they ended up assessing me using the new policies. As a result, they turned around and they finally told me I could borrow 357k but I had to close my credit cards and remove the redrawable amout off the home loan for the PPoR. Major, major difference.... anyway, this has worked, fingers crossed. I doubt that I am in a position to borrow for any more IPs for some time now though...

 

Still might not make any difference, the banks have cap on how much rent they will count for serviceability, sometime increased rates negate increased serviceability. Improving the property may reduce your income so reduce your serviceability.

 

@Gockie
You probably still can - there are banks that will lend when nab had said no.

 

It's likely #2 - still need to confirm my borrowing capacity with my broker though. Before the policy change my issue was the amount of deposit I have and not the servicability. And now it is likely still the amount of deposit

 

I’m not really sure how the new APRA policy affects me. At the moment my main barrier is lack of deposit/lack of equity. I went to the CBA in early May, which was 3 months after I bought my first IP (which is positively geared). The CBA gave me a pre-approval for 5.5x my current salary at that stage for another property. Now it’s late July so a lot has changed over the past couple of months and I’m not sure if they’d still be willing to lend that amount.

 

You could still qualify under the previous policy if you pre-approval was complete in May. I would be contacting the bank and looking into this, it only last until September. I would be seeing how you would fair based on the new policy, might bring forward a purchasing decision

 

For you maybe

 

I’d like to purchase something before the end of the year but I’m not in a huge rush. Unless I lose my job I certainly plan on purchasing a place within this financial year.

 

We could all pretend the changes arent real... but I prefer fact over fiction

 

To be fair Dave, this will have a significant impact on the majority. It may not affect you, but you will be in the minority.

 

Whilst NAB may have said no - based on the general info there I'd take a strong punt to say you could have potentially have been eligible to borrow with OTHER lenders.

Every person has no doubt been impacted by the changes, some more than others. What I'm finding however is that many who don't understand who has changed in what ways are leading themselves blind to unnecessarily constrained borrowing situations - potentially leaving perfectly valid lending options behind.

 

Could be but even I got nos from what was regarded a generous non bank lender cause I self manage a couple of properties and they don't like that. So it was quite difficult...

 

It has definitely affected me.

Going from 90% LMI purchases with big 4 to now scrambling with other lenders to purchase at 80%. Accessing equity will also be very difficult as well.

A double whammy of APRA and banks being extremely illogical with how they treat overseas income.

 

Yep, happy with that. Just don't like when people generalise for everyone.

 

It will very much effect the majority if not ALL investors in some way or another. Some just may not know how or it has an effect thats less quantifable then a borrowing power figure (e.g. increase portfolio risk). Thats not to say that it means BORROWING POWER is now crunched in so far that people don't have options. Investors certainly do have options with other lenders. As i've said in other posts, the solutions are different, but they're still there.

In terms of how everyone is impacted one way or another:

1. LVR/Cashouts - this is trickier to do and will only get harder. Serviceability tightening may mean your past your wall with INDIVIDUAL lenders who you already have debt with, but that shouldn't restrict your overall portfolio. IMO its a matter of time before we're capped at 80 with the broad majority of lenders for investors.

2. Finance risk - opportunity to extend I/O periods may be more difficult for some now. This needn't have a tangible impact, but the risk of this happening is certainly greater.

3. Pricing. Pricing on investment loans that aren't discounted yet is impacted.

4. Efficiency: refinances may be necessary to realise equity. Relatively minor costs, but it does add innefficiency costs to a portfolio.

With regards to borrowing cap, solutions are available now and i'd go as far to say that anyone that thinks they've reached their wall BECAUSE of APRA, has either been misinformed or should get a second opinion. Re-run the calcs with a few lenders i mentioned in the 'grow a large portfolio post'. One exception i can think of is if your employment conditions worked with previous lenders but not with the new ones who are little less flexible here.

In saying all this, just because solutions are out there it may not be prudent to take them. Some of the buffers applied are practical and reasonable from APRA.

Cheers,
Redom