The new investment finance normal

It was generally said and recommended 18-24 months ago that IO @ LVR 88% was the recommended sweet spot to manage the trade off between LMI and the size of the deposit.

So in the new APRA-influenced investment lending environment focusing on P&I, what is the new deposit sweet spot?
( what LVR ? - 80%, 88%, 90% )

 

I dont believe that a conclusive rule is valid now.
Occupation ? Lender ? and new servicing calcs for the lender all affect this. APRA arent a lender but dictate policy (often)

 

If you have IPs and servicing is tight, 80LVR is going to be it.

If you service on the 2 big insurers calcs, you do, so 88 would be the same now as 88 before.

IMO

 

88% is still a sweet spot for LMI. It's generally the highest base LVR lenders will go up to for investor loans too.

The biggest change is that lenders now aren't overly keen on IO for loans above 80% LVR so if you're relying on 88% LVR loans then be mindful that repayments may have to be P&I

Cheers

Jamie

 

Interesting how it seems to have come almost full circle;

I am one of the posters old enough to remember when to get a House loan you had to have 20% deposit (plus purchase costs)...balance; an 80% P&I loan over 25 years.

And, the total debt repayments had to be 35% (or maybe it was 50%?) of your gross income.

 

The 88% rule still applies when taking consideration to the LMI "sweet spot" and retaining funds for future purchases.

In the new world though you need to now consider many more factors:
1 - You pretty much have to go P&I repayments, what does this mean for cashflow and can you afford it.
2 - If you can get IO, the rate for IO and an LMI loan means your paying an absolute premium. Terry is trying to work this out but I think we are going to find P&I even if marginally worse whilst you own a OO will still be a MUCH better long term decision.
3 - If as per above your going P&I their are less long term benefits to having a higher loan amount. I can't work it out but I would say the cost of the LMI would be similar to extra tax benefits over the long run.
4 - Most importantly do you have the capacity to purchase more property. The main reason for going 88 on top of point 3 is so you can retain funds to purchase more property. The issue now is that people simply no longer have the capacity, this is why it's critical a broker maps it out for you.

You may find that regardless if you used less deposits you still only could max out on 3 properties so you have paid LMI for nothing.
But on top of that if you can stretch it to 4 then Is the cost of LMI and the higher interest rates even worth it? In the long run what does this mean for property 4 and how much growth it needs?

It's simply not simple anymore!

 

So 88% P&I may be the new normal for starting-out investors on lower incomes with a smaller deposit.

What's the trade-off/comparison for 88% versus 90% P&I for a $350k investment purchase.

How does that compare with 80% IO?

 

Tier one lenders aren't offering I/O above 80% any more, even for investment lending. They still offer I/O up to 80% and even for owner occupied purposes.

Most of the second teir lenders that are independent of the big 4 are still okay in the > 80% space for I/O, although most have restrictions on I/O for owner occupied purposes, even below 80%>


Pricing is another place lenders are discriminating at the moment. Previously the big banks were quite negotiable. Today they'll negotiate P&I rates, but there's very little given for I/O loans. I suspect this will change over time as lenders meet the APRA targets.

 

The way it is looking, the sweet spot might soon be 100% ca$h

 

88%+LMI is still the sweet spot for LMI.

The effective balance is whether whether you need to use interest only, and how much deposit funds available. The gearing benefit has not changed and if you can only make a purchase at 88%+LMI, there's still no question as to whether to use it or not.