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As investors flock from mining town to mining town the banks have moved to stop the speculation. Can you still finance your investments?
Blogger: Otto Dargan, director, homeloanexperts.com.au
As mining areas such as the Pilbara in WA and Mackay in QLD come off the boil, it’s high time we took a look at what the banks think of mining areas and their risk as an investment.
Several banks now have official, or unofficial, policies which are limiting investors who are seeking a quick gain from buying in mining areas.
Keep in mind that you as an investor may benefit from large price rises, however the bank doesn’t. Yet they do take a risk that if prices fall then they may be left exposed. Their interest rate is the same no matter where your property is, so they simply aren’t as comfortable taking the extra risk for no extra reward.
So what are the changes and how do you need to change your investment strategy?
Rental income assessment has become a little more complex. If you are getting 15% returns then fantastic! However the banks aren’t sure how sustainable these yields will be so they tend to only use part of the rent in your assessment.
Lenders like AMP, ANZ and BankWest cap the rental yield between 4% and 10% whereas Westpac tends to use only 60% of the rent received when calculating your ability to afford the loan.
Banks don’t want to see you reliant on high rental yields to make your loan repayments. If you have a good income from your job then this won’t be a problem.
LVRs have dropped across most lenders. Specifically for investment loans, if you are buying a home to live in then you may not have the same problems.
ANZ and Westpac have a list of postcodes which contain single industry towns in which they limit the percentage of the property value that you can borrow.
Can you still borrow 95%? Technically 'yes' with some lenders, however in reality it is going to be harder. You’ll need to have a good income, good asset position and not to have all of your properties in one town.
The real question is: do you want to borrow 95% in a mining town? It’s a big gamble and if you don’t have the funds to back you up then you may find yourself in trouble if the area you purchased in has a slump.
Overall these policy changes are a good thing. Investing in mining towns is a great strategy for people who have an understanding of the mining industry and experience investing. And these investors still have access to funds.
However there needs to be some common sense checks and balances put in place to prevent bubbles and people getting their fingers burnt.