Impact of move to 80% LVRs for investors

I have never seen or heard of such a clause before. Many in fact state that there is no need to notify the mortgagee if the house will be used for residential leasing.

 

In my work as a MB I see 2 broad types of clients. Those with plenty of equity who run out of serviceability before deposits and those with the reverse - not much equity an a bit of serviceability who will run out of deposits before serviceability wall is hit (prob they will hit this too now).

Many investors were buying at 90% and then topping up, after 6 to 12 months, to extract equity to buy more. These sorts of investors will now be unable to borrow. Probably about 30% of my clients were like this. So I think the tightening up will have a big effect on demand.

 

Already happened. The big four have all increased their sensitised rate recently and no longer use actual repayments for other home loan debt.

 

Looks like there's been some effect => Home loan approvals dive sharply despite rate cut

Some quotes from the linked article :-

"Home loan approvals fell more sharply than economists predicted in May, despite a cut to the official interest rate during the month."

"The number of approvals fell 6.1 per cent in May, outstripping economists’ expectations of a 3 per cent drop, as record-low interest rates failed to stoke loan take-up."

"The total value of loans approved for property investors also declined in May, falling 3.2 per cent to $13.04bn."

"A number of Australia’s largest banks tightened loans to investors during the month, after the Australian Prudential Regulation Authority warned it would crack down on aggressive lending."

"The number of first-home buyers, as a share of the market, rose, increasing to 15.9 per cent in May, up from 15.8 per cent in April."

"In trend terms, which strips out month-to-month volatility from the figures, the number of home loan approvals dropped only marginally, slipping 0.2 per cent during the month."

"Meanwhile, loans approved for the purchase of new dwellings eked out a minor increase, lifting 0.3 per cent on a seasonally-adjusted basis"

 

I am thinking since a lot of people are now priced out of the CBD due to only able to access 80% of their highly leveraged equities, the regionals would be their new target because of being able to place a deposit plus the rental income is also higher.

 

I hope you don't mean cross collateralise?

 

I do think it will dampen demand at the mid to high end but we may not see it trickle through in a meaningful way for a few months. That article is interesting.

 

Hi,
I have always bought property with based on 80% LVR or less and most of the time I have used my own funds vs equity "etc". In saying that I think the investment market will slow down in terms of investors purchasing properties but it wont slow the the people who are looking at buying homes to live in.

 

The single greatest myth of property investing is that equity equates to purchasing power. It never has. It never will.
One can manufacture all the equity in the world, but unless one has the borrowing capacity to access that equity, it's "value" can only be realised via selling.
This myth has been perpetuated for the past two decades on the back of the greatest expansionary credit environment in history, largely by those with little or no understanding of how mortgages are funded (not a criticism - just a fact) and whose personal investment strategies have coincided with that expansionary credit environment. Again. No criticism. Those assumptions were fair enough as long as the music didnt stop... after all it's worked for 20 years for some people.... but the music stopped around the world a few years back and Australian investors thought it would never stop here. APRA has now taken steps to bring that expansionary environment to an end, or at the very least, slow it dramatically, so it is borrowing capacity not equity that investors will now come to realise is the thing they should be trying to manufacture

 

Agreed. Debt reduction will now need to form a core part of investors strategy, where capacity constraints are biting. It will create equity and create borrowing capacity.

 

Or one can increase servicing by increasing rents due to renovations during the equity manufacturing process, and then have a pile of equity to tap into with the increased income?

 

Good point about alternative ways to invest to increase borrowing power. Debt reduction is certainly one tool, but the effect isn't really that great in the short term (reducing PPOR debt will increase borrowing power by equivalent amount + tax + negative gearing impact).

Some of these APRA tactics may encourage investors to find creative ways to increase their borrowing power (e.g. commercial assets, renovating, developing, etc.)

In terms of renovating strategy that @DaveM mentioned, increasing rents will take you so far with that particular lender. E.g. spending 20k to increase rents by $50 per week will only have a very marginal impact on your borrowing power with that particular lender (increase borrowing by 25-30k, not much more than the cost).

Nonetheless, as part of a well mapped finance strategy, those increased rents can be 'reused' to stretch that 25-30k number out much further, 2-3 times as much. Becomes pretty powerful then.

In times where borrowing power is being crunched in/targeted, such strategies may play a growing role to build portfolios.

Not to mention the equity benefits!

 

This is a strategy I've employed before, Redom. In fact each time I get vals done on my portfolio, the first tbing my broker asks is 'how much have rents go e up since the last time we ordered vals?'

 

So what would happen if you get a 90% lend for your ppor, and then after one year of living in it you want to convert your new ppor to an IP? Is there a minimum time frame?

 

Redom, I get the first para, but could you explain the second para - how can the increased rent be "reused" and stretch?
Thx

 

Nothing wrong with that. In fact it is a strategy I have always recommended because the 6 year rule can apply - s118-145 ITAA97

 

By swapping bank calculators.

So if you go to the same bank, you may be able to get an extra 30k equity out for your 20k renovation investment.

Then you go to another bank (that takes actuals), and you can use that extra $50 increase in rental income for your serviceability.

In this example, your rent has increased by $50 per week and your borrowings repayments have increased by $30 per week (assume 5% rate on increased borrowings from renovation of $30k). The new lender will take $35-40 per week of that rental income (70-80%) and will use the $30 per week expense. Therefore in net terms, you've increased your 'surplus' that lenders base their borrowing power amounts on by $5-10 per week. Do this a few times with a few different lenders and you're recycling your borrowing power up.

Much harder to do post APRA intervention as there's fewer lenders out there in this space - but certainly still possible (this post explains it out in a bit more detail: https://propertychat.com.au/communi...e-income-in-the-new-lending-environment.1315/

Cheers,
Redom

 

Only if one uses cash to renovate. Otherwise, this is a self defeating argument, because if one has run out of capacity one cant draw on equity to undertake renovations, which means one cant increase rents.
In fact, unless the renovation is with cash, attempting to borrow for this purpose would leave one far worse off on a banks calculator. Banks will NOT take future potential rental income into account. They will service on current circumstances only, so this suggestion is effectively proposing that one who has exhausted capacity then takes on additional debt with no additional income to service it.
Hence my very strong belief in NRAS and it's exceptional debt reducing capabilities, forming part of any sound early 21st century investment strategy (not late 20th century, where credit expansion was beginning not ending, and debt reduction wasn't required to create capacity)