Every now and again, I get a bad feeling in my stomach that things are just not right. And I’m getting that feeling now about the mortgage world.
Usually when I get this feeling, it’s when I travel to a new investing location to buy houses and something jumps out at me as not being quite right. Understandably, I don’t proceed and invest there myself, so I wouldn’t buy there for clients either. And my gut is usually right!
Well, I am getting that feeling again…
So what has happened to make me feel this way?
Over the past few months, there have been small comments made by some economists that have been ambiguous. We have now hit six months of no economic growth, yet no one is saying we are in a recession. The definition of a recession is two consecutive quarters of no growth.
We are experiencing the lowest interest rates we have ever experienced but they aren’t low due to Australia being in a great place. Low interest rates signify a slow economy, with the low interest rates being a way to stimulate the economy. And then there’s the ‘Trump Factor’. Good or bad, he is an ‘unknown’ currently.
In the last 6 weeks, we have seen several lenders increase their fixed rates, the five-year fixed interest rate has increased by as much as 0.6 per cent.
Coupled with this, investment loan interest rates have increased by several lenders between 0.08-0.25 per cent, this is outside any RBA meeting.
Either the banks are trying to gain margin back on their lending or they are seeing troubled waters ahead. I think it’s a bit of both.
On top of this, some lenders have also changed their lending policies for investors. Policy changes include;
- Removal of negative gearing to service a borrower's ability to repay the loan, servicing is calculated on a principal and interest loan term, not the interest only repayment (yes this was an old policy... possibly not a responsible one). Rental income used for servicing is taken at 60-75 per cent of the actual rent received.
- Loan repayments are serviced at 7.25 per cent as a minimum, so regardless of the current rate paid, there is always a buffer. You add that to a portfolio of properties, at principal and interest plus reduced rental income... and you can see how it gets tight very quickly.
- Some postcodes, lenders are simply not using rental income at all to service the debt, so the only way to borrow to buy in that area is you have to be able to service the debt without rent, meaning, they will only lend to borrower with a higher income for servicing.
It would appear the lenders are either over exposed in certain suburbs or are trying to reduce their lending to investors. Of course the APRA changes have made an impact into lending policies, and we will continue to see this reflected in the coming months.
As negative as that sounds, I see this as a positive.
We will see the Sydney and Melbourne property markets that are primarily investor focused come to a halt. As a lot of the markets in the higher priced suburbs, the yields are already too low, that tightened lending only makes it near impossible for it to keep growing.
These changes affect investors more so then home owners, or owner occupied borrowers. Tightening of home owner markets will be impacted when/if the RBA increase rates themselves.
Now for myself, I like to invest in property cycles where the market is dead or just emerging. It means that I have zero competition from other purchasers and I can negotiate a great deal. This turning of the tides will present more locations that I can invest in, in the years ahead. And that can only be a good thing.
Unfortunately, there are many cities and regions across the country that have seen significant capital growth that was only fuelled by low interest rates. These locations will become apparent when the rates start to rise, as their property markets will see instant negative growth. True colours will shine!
So what should investors be doing now to combat the interest rates as well as capitalise on new markets that will start to present themselves?
Interest only loans with some lenders attract a higher rate then those principal and interest loans. So if you can afford it, and your lender offers this, it might be worth switching to principal and interest to save some dollars.
Fixed rate loans – there are some good deals still out there? And with interest rates increasing outside of the RBA, locking in might be the idea. Talk to us to see if this is suitable for you?
Switch lenders – if your loan was a 95 per cent and the value has increased, chances are we would refinance your loan at 80 per cent LVR and obtain a better rate, as the lender now sees the loan as a lower risk, thus offers a better interest rate?
Talk to us, it might even be worthwhile tapping into equity now while the market is good, let the funds sit in an offset account ready for you to pounce on an awesome deal. Remember, in a turning market, cash is king!
I myself have fixed a portion of our portfolio, left the properties I think I may sell in the coming three years as variable, and have switched a few to principal and interest. That way, we have a diversified portfolio, not only by location, but by repayments and interest rate… I don’t want to put all my eggs in one basket, but I want to keep my options open, for what opportunities may come down the track.
About the Blogger
Director and location researcher for the wHeregroup, Todd Hunter had accumulated a personal property portfolio consisting of 50 properties by the age of 31.
He is a regular commentator for Smart Property Investment.