Just when you thought the dust had settled, out comes another credit policy change which is a game changer, particularly for property investors.
When assessing your borrowing capacity, banks and lenders account for existing home loans you currently have, as these are commitments you need to keep making. Fair enough..!
Rather than using the actual rate you are paying on your current home loans (or actual repayments you are making), banks will load your current interest rate to include a buffer. The rate is loaded by as much as 4% and repayments are assessed on a P&I repayment basis. Some lenders use 8% to stress test your current loans, which is over the top in my view.
The most sought after commodity by property investors is mortgage finance, as this enables you to continue to grow your property portfolio. Savvy property investors know that to create massive wealth through the power of property, the secret is to continue to borrow money to buy investment grade properties with strong capital growth prospects.
As your loan portfolio grows, so do your repayment commitments and you should therefore only take on debt you can afford. Cash flow is important. Be smart and continue to invest, but don’t be foolish and over commit..!
Up to very recently, a couple of lenders on our panel took a common sense approach to assessing an investors borrowing capacity as they took the actual repayment amount for your current loans, and loaded the repayment amount marginally to include a buffer. If you were making I/O repayments, then this worked in your favour.
However as of today (Friday 18th November 2016), the game has changed… again..!
APRA is the regulator pulling the strings, with the motive to curb investor lending further. Banks and lenders have been forced to tighten up their credit policies further, which is positive for a healthy and sustainable property market.
All lenders on our panel will now account for your existing loans on a higher loaded rate (7.40% to 8% is commonly used across all lenders), and the bank will assume P&I repayments on your current loans, even if you’re actually making I/O repayments.
This will have a significant impact on your ability to borrow more money, and unless your household income (including investment income) is strong, then you will find that you will reach your maximum borrowing capacity much sooner.
There are a number of strategies you can use to ensure you optimise your borrowing capacity right now. These include:
- Ensure ALL your current home loans are on the lowest interest rate possible
- Ensure your properties are not cross collateralised
- Build financial buffers at every opportunity
- Gear your properties to the maximum possible at all times
If you are a property investor (or want to be), an experienced Finance Strategist (or experienced Mortgage Broker) with a large investor client base, is the best person you can have in your corner right now. This will ensure you are strategic about your lending and you can optimise your borrowing power at all times.