Will Borrowers Need to Bare Their Spending Soul to Big Lenders?

For the last 12 months, we’ve watched as banks have decreased their credit risk by falling into line with APRA’s new lending guidelines by drastically overhauling their eligibility criteria. This trend looks set to continue well into 2017 – and for investors, this means that now more than ever, having a balanced property portfolio is essential to ensure you’re not adversely impacted.

The Positives

The idea of lending conditions becoming stricter, could make some borrowers nervous. But for every grey cloud, there is a silver lining, and at the moment those silver linings are abundant.

To begin with, the reason why lenders are being so conservative is because business is so darn good. Property values keep rising overall: just take a look at the February 2017 CoreLogic update, which reveals capital city dwellings have grown a further 0.7% in the last month alone. Capital city growths are up overall by more than 10% nationally.

From a long-term perspective, it’s possible that a slowdown in investor buying may also slow property price growth – which could benefit those who are currently wrestling with affordability.

The ‘Need-to-Knows’

In the wake of changing lending criteria, income streams like rent, commission, and overtime don’t count as much with certain lenders, and a new model for calculating living expenses has loan-seekers facing either a low borrowing capacity, or none.

Part of the reason these changes are occurring, is due to Sydney and Melbourne’s property boom, and the worry surrounding unit oversupply across the country, as lenders are concerned about the surplus in the apartment market.

As such, banks are protecting themselves. As we know, this type of reaction by the banks to the market is cyclic. It’s important to keep things in perspective though: while some lending giants, like Commonwealth Bank, Bankwest and AMP, won’t refinance investor loans, there are still dozens in the market who will. In fact, Westpac are reportedly positioning themselves to take advantage of CommBank’s new policy.

What does this mean for investors?

If you don’t yet have the income or capital behind you to impress the banks, then you may have to be savvy when shopping for a property and/or a loan. New and young investors may need to get a little crafty with how they approach their investing and/or their lending – for instance, they may have to consider buying in low cost, high growth, large regional areas instead of high cost, high growth capital cities or they may need to consider partnering with someone in a joint venture.

This may also be a period that investors look back and recall ‘what a great time’ it was to buy and hold property for huge capital gains.

After all, following the first round of lending changes, investor activity dropped off. These new changes have been implemented because investors are back in the market – which tells me that investors are a die-hard, determined lot, who aren’t going to let these speed bumps slow them down for long!

That said, when investing activity does slow again, and it will, you need to be ready to act. When people are nervous and lending is restricted, there are fewer buyers in the market and greater opportunities arise for investors to snag high-performing property.

Of course, knowledge is a powerful ally, so let’s take a look at the current events potentially impacting your investing:

WA property highlights: 2017 has already started to show some promise for the Perth market, with new figures showing unit values have been climbing. While the capital’s January growth was only 0.2%, the total 3-month improvement sits at 2.1%. The WA economy largely relies on iron ore and LNG industries which have staged an amazing recovery since late last year. Iron ore prices have hit $90/tonne, up from a low of $30/tonne early last year, with predictions that this price will continue into the foreseeable future. Could we finally be finding the floor of the WA market?

Credit card relief: ANZ revealed that it will be the first of the four major banks to cut their credit card interest rate, on the heels of accusations last year about interest rate gouging. The move is expected to provide a little relief to around 500,000 Australians – and might be the precursor to further cuts by other major banks.

Interest Rate Movement Prediction 2017: There are mixed expert views on whether interest rates will rise or fall during 2017. I believe that the Australian economy is not ready for an interest rate rise yet, but that a rate cut is more likely than a rise. I say this because the senate in Canberra refuses to pass the necessary spending cut legislation that will reduce government debt, inflation levels are low and GDP is very low. Based on these fundamentals, the RBA will therefore need to continue stimulating the economy which means that they will need to keep interest rates low.

Capital Gains Tax talk: There has been talk around that the federal LNP government maybe considering introducing changes to the CGT legislation. The Turnbull government has refuted this and has stated that there will be no change to the CGT.

Each month, we’ll bring you the latest on all the major market conditions through our monthly market wraps. We have our finger on the pulse, and we’ll aim to keep you updated, so you’ll never be caught unaware!

Helen Collier-Kogtevs

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