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Credit is tightening… so what can you do about it?

Australia’s banking watchdog APRA is worried about the housing market overheating and exploding.  To counteract this perceived risk, APRA has changed the rules of play which Authorised Deposit-Taking Institutions (ADIs) must adhere to when assessing loan applications.  Read APRAs letter here.

In summary, APRA expects ADIs to adhere to the following:

  • Limit the flow of new interest-only (IO) lending to 30% of new residential mortgages
  • Place strict internal limits on the volume of IO lending with an LVR >80%
  • Ensure there is strong scrutiny and justification for IO lending with an LVR >90%
  • Maintain lending to investors below the 10% maximum growth as implemented Dec-14
  • Ensure serviceability metrics are set at appropriate levels for the current conditions
  • Restrain lending growth in riskier segments such as high LVR loans

I think government intervention is a good thing to ensure a healthy and prosperous property market.  As Wayne Byres (Chairman of APRA) recently said, “if we are going to put an increasing number of eggs into a single basket, we’d better make sure that basket is an unquestionable strong one”.

That statement in itself re-assures me (as an active property investor) that the Australian property market is here to stay as its popularity and resilience cannot be ignored.  The government wants to make sure it doesn’t end in tears and that borrowers can meet their commitments.

If you’ve been wanting to borrow (more) money particularly for investment purposes and you’ve been knocked back, hold onto your hat as it’s about to get worse… much worse..!!

So what can you do about it?

Whenever I’m faced with a problem, I like to break it down to two key areas:
1… What can I control?
2… What can’t I control?

Macro prudential controls introduced by APRA are out of your control.  We can complain, but nothing’s going to change the situation and it won’t help you.

If you want to be proactive, you should read the detail carefully and understand which strings APRA is pulling.  Then once you understand the levers, you can try to improve your own personal situation to ensure you meet the stricter lending criteria we find ourselves in and ultimately help you get what you want (e.g. more borrowed funds).

As an experienced Mortgage Specialist, I’m across the detail (it’s my job) so let me make it easier for you.  Here are the “key target areas” by APRA which you should focus on if you want to improve your borrowing capacity:

Loan to Valuation Ratio (LVR)

  • Aim for 80% maximum gearing particularly for investment lending

Serviceability

  • Improve your household income
  • Ensure your investment properties are achieving maximum rent
  • If you’re in business, increase your bottom line and pay the tax
  • Pay out your unsecured loans (e.g. car loans, personal loans, HECS)
  • Close off investment credit lines if you’re not using them (e.g. margin loans)
  • Reduce or cancel your credit cards (you’ll be surprised the impact this has)
  • Adjust your lifestyle to reduce your monthly declared living expenses
  • Ensure you’re on the best possible rate across all your loans (shop around or ask us)
  • If your current loans were taken out some time ago, refinance and re-set the term

Repayment type

  • Where possible choose P&I as IO loans are a hot button for APRA right now

When it’s all said and done, those that make the effort to increase their borrowing power will prosper, as you will be able to buy more property and possibly create more wealth for you and your family.

I believe that the Australian property market is in for a very bright future and macro prudential controls implemented by APRA are aimed to weed out speculators, which I think is a positive step for the future of our property markets.

I hope the above gives you food for thought and provides more clarity to all the noise going on at the moment.

Disclaimer: This information does not take into account your individual objectives, financial situation and needs. You should assess whether the information is appropriate for you and seek specialist advice from a qualified and licensed advisor.

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