A drop in interest rates would historically signal a potential rise in property values, resulting from the additional demand created by the additional borrowers putting upward pressure on the supply and demand ratios. Couple these additional buyers with a competitive lending space and a relaxing of lending criteria and you get a great opportunity to move into investment property. What will you do?
In the last two years, an investors access to finance has been affected by two key decisions made by the banking regulator APRA. Stricter lending guidelines on all loans and the cap on interest only loans imposed upon the lenders. APRA has announced a turn around on both matters and combined with consecutive interest rate reductions the lending market has become more flexible and accessible for property investors.
Investors in Australia have been given three great reasons to enter the investment property market.
- Two consecutive interest rate reductions
- APRA lifting the cap on interest only lending from Jan 2020
- Reduction in loan serviceability assessment criteria
Interest rate reductions
The reductions to the official cash rate that occurred in June and July have created a competitive atmosphere amongst the lenders. Whilst we don’t know where the discounting will end, what we do know isthat Lower interest rates, due to financial deregulation and lower inflation, were a major contributor to the significant increase in property prices over the past two decades. Recent RBA research highlighted that interest rates were a major driver of the recent east coast property price boom. The research found that a one percentage point reduction in interest rates boosts property prices by about 8 per cent in the following two years.
Interest only cap
APRA, The banking regulator is set to remove its caps on interest-only lending, a move which is tipped to open property investors to more financing options in 2019
From 1 January next year, APRA will remove its 30 per cent limit on interest-only residential mortgage lending for banks and other lenders.
This cap was originally put in place in March last year in a bid to reinforce sound lending practices, and has resulted in a cooling down of the interest-only lending market.
According to APRA, the introduction of the benchmark has led to a marked reduction in the proportion of new interest-only lending, which is now significantly below the 30 per cent threshold.
What does this mean for property investors?
In short, this move opens up opportunity and promotes competition in the lending market for investors. Many lenders closed their books completely whilst others priced the interest only product uncompetitively. For many investors the effect of the cap simply restricted how many lenders they could choose from.
The result of the cap has been that investors are now being mindful of their long term goals, ensuring the product they choose is more suitable to their overall strategy.
APRA has stated in a letter to authorised deposit taking institutions (ADIs.), that lifting the caps will not mean its supervision of interest-only lending practices is relaxed.
Changes to the 7% serviceability assessment
Finally, the banking regulator has finalised its guidance for lenders on how they should assess loan serviceability, in a move tipped to make access to finance easier for investors.
Lenders and banks were told by APRA that it will no longer be necessary to assess loan serviceability on the assumption of a 7% interest rate.
Instead, the lenders will be in the driver’s seat, and authorised deposit-taking institutions (ADIs) will be able to set their own review standards, factoring in a buffer of at least 2.5%interest.
The new guidance is effectively immediately for Australian lenders.
So, with these three (3) exciting changes what will you do? To have a discussion, obligation free, about what options are available to you right now, contact Launch Properties.
About the Author:
Steve Purcell is located at our head office and is the licensee of Launch Properties. He holds a PSBA License, is a licensed Auctioneer and holds a Masters Degree in Business. Steve brings an extraordinary depth of hands on experience to the role including twenty years in commercial and residential construction, followed by ten years in residential Real Estate sales and property development. This unique blend enables Steve to advise his clients on selected developers, to ensure they are providing functional, quality assets with high quality finishes to mitigate potential sector risks to our clients. Become a client of Stevens and get access to RP Data suburb reports, market valuations and advocacy options.
Steve Purcell can be contacted on 1300 925 081 or by email on firstname.lastname@example.org
Disclaimer: The information, analysis, provocations, suggestions and opinions contained within this email are provided by FPS Property Pty Ltd (ACN: 169 144 361) t/as Launch Properties under Property, Stock and Business Agents Corporate Lic # 10022396. You should consider whether the information or advice contained in this email is appropriate to you having regard to these factors before acting on it. You should seek personalised advice from your financial adviser and your accountant before making any financial decision in relation to matters discussed in this email.