Over the last few months, I have been watching APRA and ASIC with an eagle eye and what’s interesting is that they are tag-teaming in their deliberate effort to cool the residential market.
In an announcement to lenders last Friday, 31st March, APRA communicated that they had to:
- Reduce the number of new mortgages that are interest only to 30%,
- Limit the volume of interest-only loans above 80%,
- Scrutinise all interest-only loans above 90%,
- Ensure that lending to investors remains below the 10% growth benchmark,
- Continue to be vigilant with their serviceability calculations to ensure the net income buffers and interest rates are set to current conditions,
- Continue to restrict all high-risk loans such as:
- Loan-to-income (LTI)
- Loan-to-value (LTV)
- Long-term loans (LTL)
Over the years, APRA has deliberately been doing all in its power to reduce the percentage of interest-only loans to 30% of all loans written, however it currently stands at 40% and in APRA’s view, this is too high by international standards.
The other main focus for APRA is to ensure that the serviceability calculators that lenders use, factor in buffers so that the borrower can handle unexpected events if and when they should occur.
What’s ASIC’s role in all of this?
Well just this week, 3rd April, they announced that they are the watchdog and they will be focusing on lenders and mortgage brokers to make sure they tow the line. They will use their power to gather data to monitor the industry to identify any lender or mortgage broker recommending a high percentage of expensive interest-only loans.
Given all these rules, Aussies are still buying properties with earnest especially in the Sydney and Melbourne markets and the reason is they still see property as a key vehicle to a financially stable and comfortable retirement.
So what does this all mean for investors?
Well, I can tell you this…
Regulation is needed!
How far will they go? Well only time will tell.
In all my years of investing, my experience has been that they go in hard with implementing new rules, then over time, they back it off.
They then go in hard…then back it off again.
One thing is for sure, and I have been saying this for years…investing in property must be done following a strategic, disciplined and low risk approach and by ‘low risk’, this includes BUFFERS!
You’d be mad to invest without a buffer and now APRA is forcing the banks and mortgage brokers to make sure you have something up your sleeve in case life goes pear-shaped. For example, interest rates go up, you get sick, lose your job or have a relationship break up.
These events will happen to us at some point in our lives so why not plan for it.
I tell my students all the time, when designing your personalised investing strategy, make sure you keep a buffer…buffer, buffer, buffer! No buffer, no investing!