How to grow a multi-million dollar portfolio on an average income in the new lending environment

There's a rate loading too - the higher the LVR the higher the rate. Goes up past 5% as you go to 95.

Cheers,
Redom

 

I think you're going to find that these APRA changes to assessment buffers are not a short term thing

 

The more i think about it, the whole 'actual repayment' policy is contrary to one of the key pillars of our prudential system (assessment buffers are a big tool). It doesn't at all make sense to have an assessment buffer whose purpose is to protect borrowers against interest rate rises and then ONLY apply it to certain debts.

In saying that, as i mentioned in OP, the market moves when it wants to and APRA will only kick up a fuss when they need to. Right now they need to. We're at elevated risk levels and they need to be managed.

Fast forward 5 years and if we have investment lending growth coasting at 5%, i don't think they'll care as much what lenders are doing on a micro level. The macro is fine and the need to delve into the micro will be less essential.

One of the biggest parts of APRA's oversight policy right now is a strong focus on data collection and stringent monitoring. This will fall by the wayside in slower conditions and they'll revert back to their usual annual 'stress testing (macro)' approach.

Cheers,
Redom

 

I disagree, I think the policy changes being made by the lenders are going to be around for a very, very long time.

There's actually two general types of changes which lenders are instituting. The policy changes, which everyone is discussing, and the risk changes which the lenders haven't talked about officially, but are having a real effect as well.

Think of policy as the business rules under which the bank operates and the risk appetite being the layer under that to determine if they actually want to give you the money. Policy is fairly black and white, risk is very much a very big grey area and the banks don't talk about it in any official terms.

As the investment market and APRA preasure eases, the banks risk component will also ease off. It's very unlikely that they'll ease off their policies any time soon, if only to continue to visibly appease APRA. Again, policy changes are quite visible, risk appetite changes are quite subtle. The banks responses to APRA haven't been subtle at all.

Certainly lenders risk considerations have changed quite a bit since the GFC. They've swung both ways several times in the last 7 years. I think you'll find that many of the policy changes introduced in 2008 still exist today.

 

@euro73 and @Peter_Tersteeg - don't scare me please

What happens when Sydney prices halt and investor growth drops below 10%?

Im hoping it will only take one or 2 good lenders to become the new AMP or new option for us. Others would follow as their growth requirements dictate. Just a theory..

GFC ended 95% loans, but they came back.
However it also ended low doc..

Either way - smart brokers like yourselves will always be here to make things happen, things that wouldn't happen if we walked into a bank.

In fact I would hazard a guess that broker market share compared to direct banks is going to get a big jump. Not sure if banks would like that either

 

When Sydney prices ease off and investor growth reduces below 10%, nothing is going to happen to the lenders policies. We'll be stuck with what we've got but at least it probably won't get worse.

Actually most of the current conditions for 95% loans are the same today as they were after the new policies introduced during the GFC. ANZ does 95% loans only for existing customers. Until recently Westpac group was doing 95% investment loans but only if you had 10% equity in another property. Both are GFC policies.

I don't see anyone trying to put their hand up to become the new AMP anytime soon especially if they're under APRA's umbrella. @Redom started this post explaining that the lenders that will be generous moving forwards are those whose funding sources are essentially outside of regulation. True enough. What hasn't been stated however is the stability and risk profiles of these lenders.

FirstMac is a very conservative lender. Their calculator and policies are quite good, but their risk acceptance will stop them from being the lender many people want them to be.

Pepper and some other non conforming lenders have good policies and high risk tolerance, but if this is the combo you're looking for it's going to cost you big time. They're reducing pricing at the moment but they're only going to go so far and if the lending environment gets really nasty, their rates will increase very quickly.

Then there's the lenders that will try to take market share using aggressive lending policies and cheap finance. If we see another GFC type environment, it may be very risky to be borrowing money from these guys, especially since you'd probably be so highly exposed that nobody will want you if you need to refinance away from them.

A lot of people haven't seen anything but good times in the property market. There were a lot of small lenders that looked good in 2007 but became cancerous in 2008, some borrowers are still stuck with them today. Small aggressive lenders were dropping like flies during the GFC and they took a lot of investors with them.

It is still possible to build a decent investment portfolio on an average income. It's not as easy as it was 3 months ago and it's not about to get easier. You're not going to be able to get quite as far but you can still make a good go of it. Those who are using aggressive strategies may find that their finance exposure is riskier and potentially more expensive as well.

 

Makes me sad and I respect your experience, but I hope it won't be the case.. if policy means that the are sticking with the massive buffer on rates. I would hope they will tweak other things that may help. Increasing the amount of rent accepted would be nice
In a competitive environment, surely there must be someone coming to the rescue after a few years?

What does risk acceptance mean? Credit score? Or someone with too many properties or too many inquiries would fail approval?
I'll probably find out when you put my application in soon..

How does Firstmac fit into this? More reliable than those dodgy lenders?

 

I agree @DanW I don't want these changes to stay in place. The problems APRA is trying to address are short term but the changes being implemented are in nature long term. Certainly lenders can change their policies fairly quickly but their track record on this isn't good.

Many lenders and all the mortgage insurers have automated credit scoring built into their assessment systems. Whilst some of this information does come from Veda, this isn't your Veda score. I've seen people with excellent Veda scores be declined finance as the lenders decide it's too high risk.

Credit scoring / risk assessment is based on many factors. Credit history is a big one, but the makeup of your portfolio, employment history, living history, job type, family structure, what you're doing, where you're buying, might all have an impact. It also might not have an impact. Lenders don't disclose the specifics of this to anyone, not even their own staff.

FirstMac is certainly better than many of the lenders that went under during the GFC, they came through the GFC quite well. I would still categorise their funding sources as higher risk than many mainstream lenders. It's been repeatedly stated that they're conservative, only looking for low risk deals. This can easily mean that whilst you might have the serviceability and meet the policies to borrow $3M with them, they'll cut you off at $2M.

 

I would have thought that greed would have something to do with the lenders - while their track record isn't good, they've just had 3+ years of great return from the policies. When investors can't invest due to their policies, and APRA relents, I would have thought the greed factor (not the market per se) would mean pretty quick reversion to grab the investor market.

 

Firstmac relies on securitisation, which is why they are vanilla in their appetite. Their conservative risk appetite is what ensures their loan book stays very attractive to RMBS investors, and that in turn means their funding and pricing is robust. Same for Homeloans Ltd.

 

Great thread so far. I may need a new broker for myself and parents. Where u at in Western Sydney @Redom

 

Am I the only one that thinks that people circumventing these APRA's risk mitigation activities may lead those same people realising these risks in future? Some of you may well just be finding a way past the electric fence into the T-Rex enclosure.

 

Do it.

Redom is a gun!

 

I understand the need for some intervention.

I also think some investors will get a big shock when rates eventually start to move upward. Particularly those on average incomes without a decent savings buffer in place. Getting every last dollar out of the banks may end up being harmful to them in the long run.

Borrow what you can afford rather than what the bank is willing to give.

Cheers

Jamie

 

I think I created a monster !!!

 

@euro73, potential understatement of the year.

 

sorry - what do you guys mean when you say that some lenders are assessing debt at 'actual repayments'. so are you saying, assessment of serviceability will only be based on the actual rate of interest for repayments and not the 7-9% that the big banks use to determine serviceability? Is this what you mean?

 

Yes exactly @slumdogmillionaire - a few still do. For how much longer is debatable though.
This makes a large difference to borrowing power for investors who have high levels of mortgage debt.

 

@Peter_Tersteeg - great point about lender risk tolerances and something that is worth documenting more explicitly in my OP.

Looking at servicing based testing is one thing, but there are differences in risk tolerances that aren't talked about as transparently in policy/calculators. If they don't like the look of something, it may not fly even though servicing/policy metrics are fine.

I've found these to tighten up over the course of the last month or so - even for the non APRA regulated lenders. Some of the servicing based models have indicated yes, but risk based reasons like credit histories (active, but no issues) have put roadblocks with some of the mortgage managers who need to insure all their loans and hence seek external approval. Same deals a few months ago with the same lenders would've flown through no problem - even though there's been no stated change to policy/calculators.

Highlights the importance of keeping a strong file on metrics you've mentioned (credit file, employment, stability, etc) in uncertain financing conditions. The more uncertain the file, the more uncertain the chances of approval.

Cheers,
Redom

 

Absolutely Redom. I've recently had a top up deal back to 90% to access equity declined. Serviceability was more than sufficient, the client had a copy of her Veda report with an 'excellent' credit score. Bank declined the application because it was too risky.

There was only a few things I could see that made it risky.
* She'd changed jobs within the last 12 months, but her employment history was otherwise stable.
* Had moved house about the same time she changed jobs.
* Wanted cash out to 90% LVR.
* Security property was in Mount Druit (possibly higher risk than some other areas).

3 months ago this deal would have sailed through assessment with that particular lender.

Risk is something that's quite intangible and is changed on a moments notice. Buying cheap properties for cash flow is one path to building a decent portfolio, but it's also considered a risky strategy by the banks (some like to use the term, 'rent reliant').

Despite lenders still having policies of 90% investment lending, one of the biggest things to make yourself look good to lenders is to keep LVRs to 80% or less. If not for purchases, at least for equity releases. This goes a long way to satisfying their credit scoring systems. The down side is it will take more time to get access to more cash.

I guess that's the real undying theme here. It's still possible to achieve wealth goals through leveraging property, even on lower incomes. Unfortunately you can't borrow as much and you can't leverage as much. What this really means is it will take longer.