On the up: What will higher interest rates mean for real estate investors in New Zealand and further afield?
The Land of the Long White Cloud is shaping up to raise rates and the country may well be a bellwether for the Australia...
A number of lenders have made moves this week to restrict investors’ serviceability and borrowing capacity in response to concerns from regulators about the overheating property market and – according to those in the know – this is just the beginning.
This week, Bankwest put the brakes on investor lending and announced that from today, Wednesday 20 May, they will apply a maximum loan-to-value ratio (LVR) of 80 per cent for investment purposes, including shares.
The cap will apply to all loans in an application that contain a loan for investment purposes and will be enforced on all new applications, pre-approvals moving to formal approvals and applications being re-assessed for a material change.
Bankwest will no longer offer special pricing on its Complete Variable product for any loan that has investment as its primary purpose. Special pricing for owner-occupied loans will remain.
Bankwest said its position as a “responsible lender” had prompted this review of investor LVRs.
“In recent weeks, Australian banks have started tightening investment lending to comply with expectations set by APRA,” the bank said.
“These expectations aim to ensure sustainable growth in the home loan investment sector to protect both investors and the home loan market.”
Bankwest said there would be no impact on existing investment home loan customers whose application had already reached conditional approval status.
According to mortgage broker and director of Pink Finance, Nicole Cannon, Westpac also announced changes today which will impact investors’ serviceability.
Ms Cannon told Smart Property Investment that the bank will be removing negative gearing benefits from its servicing calculator – meaning the tax incentive will no longer be factored into investors’ serviceability calculations.
“It’s likely that this move will reduce the borrowing capacity of a lot of investors,” Ms Cannon said.
She said she expects investors have an “interesting few weeks” ahead of them as more banks are expected to review their investor lending policies.
“There are a whole raft of different measures which could come into play – whether it be loan-to-value ratio restrictions or negative gearing calculations – which the banks could use to try to slow down the investor market,” Ms Cannon said.
“All it takes is one bank to start the process and then they can all start to follow suit.”
Ms Cannon said the announcements will have a minimal impact on “mum-and-dad” investors who are using equity from their home to invest. Instead, it’s likely to affect renters who were hoping to continue renting in their desired location, but purchase an investment property in a more affordable suburb.
“They’re the ones that this will have the biggest impact on. They use investing to get a foot into the market – but it’s a bit of a double-edged sword.
“This is all the result of APRA [Australian Prudential Regulation Authority] starting to put increased awareness on lending for investment properties. I believe this is a way to potentially slow down the heated property market – but those who were using an investment property to get started in the market are going to be the worst affected.”
Todd Hunter, location researcher and director of wHeregroup said the raft of restrictions being announced by the banks, the governing bodies and the ATO recently mean the Sydney market is “done” and investors need to keep a close eye on new developments.
“Banks are servicing your loan application at the seven per cent mark. This is a protection mechanism to safeguard you when interest rates rise in the future. This seven per cent mark hasn’t shifted in the last three to five interest rate drops. So no matter how much the rates still go down, your ability to service more debt will not increase unless your income does,” he said.
“Banks must now also hold more funds in managed accounts per mortgage they approve. Meaning for every $300,000 mortgage, the bank must hold $600,000 in managed funds. This has doubled in recent years … This was done to attract more consumers to invest their money. Consequently, this reduced the banks’ profits by 0.25 per cent.
“So it comes as no surprise that in mid-May the interest rate war between the banks ended. One bank no longer discounts interest rates for investment loans and Bankwest has reduced the LVR on all loans for investment purposes to a maximum of 80 per cent. The others will follow this week.”
In addition, Mr Hunter said APRA has told the banks that if the investment portion of their portfolio has increased by over 10 per cent this year, they must hold another $500 million in managed funds – “meaning banks will now be reluctant to pass this level and reduce interest rate discounts on investment loans”.
Mr Hunter said the policy adjustments will cause a “drastic decrease” in investor activity.
“This decrease will significantly impact consumer confidence across the board – and the end of the Sydney property cycle will be here,” he said.
“So I will be monitoring the property market in Sydney over the coming months, as property data is all past tense. And a change now won’t be reflected for another three to six months. But one thing I know for Sydney is, get ready for a significant correction – the writing’s on the wall.”