Following APRA’s move to cool Australia’s hot property market, property investors have begun experiencing an influx of changes to mortgage lending, as well as an increased difficulty in securing funding for their portfolios, as financial institutions move to operate within their new parameters.
In this special episode of The Smart Property Investment Show, Phil Tarrant brings in top Aussie broker Ross Le Quesne to explain what these changes mean for investors and how they can protect themselves over the long term.
Tune in as the duo outline the ways in which banks are reassessing debt and how investors can qualify for loans, the importance of effective cash flow management as a means of holding property, as well as Ross’s tips for investors on how they can survive these changes and stay on the road to success.
You’ll hear all of this and much, much more in this episode of The Smart Property Investment Show!
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Phil Tarrant: Well g'day everyone, Phil Tarrant here, host of the Smart Property Investment Show, a very quick bonus episode. I thought it was very relevant that we tackle this subject so, being the investor that I am with a sizeable portfolio I'm always in tune to how changes to my ability to secure finance or the current finance I have will influence my property portfolio. So, what I've done is, I want this knowledge myself, but I thought I'd involve you all in a conversation as well. I've asked Ross Le Quesne from Aussie Parramatta to come to the studio to have a chat about mortgage rates and what is happening within the banks right now, and this is for me as much as for you. Ross, if you tune into the show often, you know is my mortgage broker, and has helped me secure financing for all my properties, and knows our portfolio quite well. So, Ross, how you are going?
Ross Le Quesne: Great. It's great to be here.
Phil Tarrant: Good to have you here. So this is me short-chatting you because I want to know what the hell's going on. But our listeners get the privilege of listening in to see what we chat about, and what we're going to think about in terms of how all these changes to bank lending is going to influence our portfolio and every Australian's portfolio. So thanks for coming in, mate, we've got about ten minutes if that's all right.
Ross Le Quesne: Not a problem.
Phil Tarrant: So, I work in the media. I get heaps of information, more than anyone else, and I've seen this week a whole bunch of press releases and communications from the banks telling us that they are pushing up interest rates and decreasing LVRs. So AMP's come out and really reduced their LVRs, and pushed up rates. St. George has come out, and Westpac most recently has come out, I believe, and said they're pushing up rates as well. So can you give me, and us, us being our listeners, a really quick snapshot on what's going on at the moment?
Ross Le Quesne: Okay. I think you've ... As a reference point if you go back and listen to the podcast we did probably about 4-6 weeks ago in regards to the APRA changes, and we're really seeing that play out in the market now. We spoke then about the changes to the caps in terms of interest-only, so that date is quickly approaching where the banks need to have the flow of new business to be 30 per cent of their new mortgages be interest-only. So a lot of what we're seeing in the market in terms of reduced Loan-to-Value Ratios, and different pricing for Interest Only, you mentioned yesterday, Westpac and St. George moving Interest Only pricing up by 0.34 per cent. And we've also seen a raft of changes from other lenders over the last few months where there's a differential pricing between what you're paying for a Principal & Interest loan, and what you're paying for an Interest Only loan.
So of course most of our investors like to manage their cash flow, and a lot of them have owner-occupied mortgages that are non-tax-deductible that they want to pay down. So, Interest only is a choice for them in the types of mortgages that they take up. So what we're seeing is, because of those APRA requirements, there's been a big shift in terms of rates on Interest Only loans.
Phil Tarrant: So what we're seeing right now is the effect of the banks having to work within the parameters set by APRA. So you spoke just very quickly then about new mortgage business at 30 per cent. And if you go back to the podcast we did and ... I'll put a link to it wherever you listen to this so you can go and check it out ... They're the requirements, they're the recommendations made by APRA, so the banks now are having to change their policies so they can fit within these APRA recommendations. So let's say AMP for example, who've dropped their LVR down to 50 per cent ... To me, it's pretty much saying, "We don't want any business," right? That's pretty much what they're doing. Because they aren't going to go that way.
So these are the mechanism that the banks use in order to control the inflows of mortgages into their business and how they price it. That's fine, that's what the banks do. So this is happening. It's probably going to continue to happen for the next period as well. We haven't yet heard what CBA's doing, I know they've pushed their rates up recently.
Ross Le Quesne: Yeah. CBA changed serviceability in the last couple weeks is a big change then, the way they're assessing their existing debts. So, potentially what it means to the investor is that they need a bigger income to qualify for the same loans that they used to be able to qualify. So that's one of the levers that they're pulling, which is from a policy based on how much they will lend you. And we've seen that will continue to happen across the other lenders as well, as one, the speed limit, the 10 per cent growth on their portfolio, the APRA thing that came in a couple of years ago, and then the newer APRA requirements which was the Interest Only requirements. And then we're also seeing APRA is then going to have further governance over some of the non-bank lenders as well.
So you can expect that, moving forward over the next few months, you'll see changing policies for the non-bank lenders. So, where investors are seeing the likes of, say, Pepper and Liberty ... Getting finance, you may see their ability to get finance with those lenders will get more difficult as well.
Phil Tarrant: So what we can be guaranteed about is that banks are going to continually change policies, pricing, and other rules for investors in order to meet the requirements set by APRA. And that's not a bad thing, and when we last spoke about these, I think we're both in agreement that what APRA was recommending made good sense from a policy perspective, from a sense in terms of controlling the speed of growth in the property market, in terms of how responsible investors should be approaching mortgage financing anyway, right? If you can borrow at 80 per cent, borrow at 80 per cent. You should be thinking about your serviceability at 7 per cent rather than at 4.5-5 per cent you're getting right now. So it makes good sense to do it anyway.
Ross Le Quesne: Exactly. And given the uncertainty in the market ... And consumer sentiment, I think, dropped in the report that came out in the last couple of days by another 9 per cent around properties. So with everything that's going on in the media, I think that is having an effect. So as you say, it's probably not a bad thing people to be borrowing at 80 per cent because it puts that buffer in there for them, and given what's happening, there's some positive changes as well. With the first home buyers and getting relief in New South Wales and Victoria.
So for that lower-priced property and the investors that own those lower-priced properties, it's going to be a positive thing for them. But they need to be able to hold those properties for the long term. So the things that we were talking about earlier, in terms of for you and your portfolio is, having that ... Do you have the cash flow buffers in place to allow you to hold your properties long term? Go through and do a review of all your interest rates, because there is so many changes happening in the market at the moment, you want to be making sure that your rates are sharp, because the size of your portfolio ... On a million dollars, if you're looking at, say, 0.5 per cent, that's $5000 a year, which is-
Phil Tarrant: That's a lot of money.
Ross Le Quesne: ... a lot of cash flow. So for the people with bigger portfolios, it makes a huge difference, so-
Phil Tarrant: Yes, it is. It's huge, and I'm really conscious of my own, because I've been checking with your offices recently, and I don't know if I'm that prickly customer at the moment where I'm, "What's going on with this rate? What's it ..." But it's good that I'm looking at my rates and working with my mortgage broker to ensure that my current rates, and for me this is where a mortgage broker adds a lot of value, is competitive.
Ross Le Quesne: Yeah, and-
Phil Tarrant: And it's competitive in the sense of, I understand my portfolio as well and what leverage that may provide, or not provide.
Ross Le Quesne: Yeah, and it is interesting, because you've had some loans come off fixed rates and then quite often the banks will revert you to a standard variable rate. If you're not constantly managing and reviewing and looking at your internet banking to see where your rates are, you could easily be a half-per cent or sometimes a per cent out of the marketplace.
Phil Tarrant: Well, and I'll talk about it one day, just how this can actually affect and impact a portfolio but ... So for our listeners and for myself, and Ross you're an investor as well, we cannot control what banks do. Banks will do what banks do in the interest of shareholders and for the interest of ensuring that they remain complaint to the rules and regulations set up by APRA to manage prudential lending in Australia. That's cool, right? It keeps us pretty safe as a nation. Can't control it, right? What you can control is understanding your portfolio. What you can control is understanding your finance, and what you can control is making actions to manoeuvre within a market that you're presented with. This is what we can control, right?
Ross Le Quesne: Exactly.
Phil Tarrant: So we're talking about rates going up, LVRs changing, and it's just noise, right? It's noise. If you want to go and have a look for it, you could find it everywhere. Go to smartpropertyinvestment.com.au, we write all about it all the time. Don't get too caught up in noise, but understand that stuff's going on, and you need to be reactive, so you've got to take control. So what does it mean for you? What you do suggest investors do right now?
Ross Le Quesne: So right now, one, sit down with your mortgage broker or finance consultant and look at your overall portfolio and look at your goals and what you want to achieve out of the coming ... Because as you said, cut the noise. Property's a long term thing, you know? This APRA thing is a moving target. As at 30th of June, that's when all the banks are going to raise assists, because it's on a quarterly basis. Well the market's slowing down a bit, you might find that policies in some areas will release after the 30th of June. So it is really noise and it is something that it is going to move on a month-to-month basis. But as a property investor myself and looking after a lot of property investors, you've got to protect yourself for the long term because we all know that real wealth through property is made over the long term.
So what are your strategies to hold your property long term? So, in terms of, we spoke about having a good cash buffer, so one, you ought to have that from savings, or while there's still opportunities, especially with some of the non-banks, you can potentially refinance to create those cash buffers. Because let's say, for example, we do get a small dip in the market, you don't want to have to be forced to sell your property at an inopportune time. So you want to be able to have that cash buffer. You want to have a look at your Interest Only expiry periods on all your loans, given those changes in that market and how easy it is to extend those Interest Only terms, you want to understand when are my expiry dates, and if those loans were to go to Principal & Interest, and as you said, potentially put a buffer in there, what ability do I have to make those repayments based on the level of income that I'm currently earning?
And then from there, once you've answered those questions, then there's other questions you can ask, in terms of, is there any properties in the portfolio that you need to offload, or what are my other strategies? Sitting down with your mortgage broker and finance consultant in line with your accountant, financial planner, buyer's agent, is good strategy.
Phil Tarrant: So I just made a little note that said, "Be aware. Take control." Right? So that's what this is all about. Let's go back to the crux of property investment. Why do you invest in property? Create wealth, right? That's the idea. And to your point, you want to try to hold your properties for as long as possible to get the benefits of multiple cycles, create equity, so it gives you a choice at a point in time what you do with that property. What the key to holding property? It's cash flow, right? And cash flow ... I know a lot of our listeners are very sophisticated investors and have multiple properties.
For a lot of our listeners, they're very new to the market as well. There's a lot of terms that we're using right now which might be quite bewildering, but think of cash flow as your ability to hold on to a property without having to tip in a whole bunch of your own cash into it to sustain it. Is that a fair way to look at it?
Ross Le Quesne: Exactly.
Phil Tarrant: So, how can you manage cash flow? You can either receive more rent, so you can push your rents up, but the market will dictate how much you can charge. Or you can pay less out in interest repayments, which comes back to sound financing.
Ross Le Quesne: And CoreLogic was interesting in Sydney that rents have increased by 5 per cent so we've gone for a lot of time of flat rental but with ... given the property prices have increased 17 per cent year-on-year, I think it's about 17 per cent over the last five years, and rent over the last year has increased by 5 per cent. So it is starting to come back, so I'm actual ... Again, one thing, review all your rents to make sure they're currently at market rent.
Phil Tarrant: And you know I'm always looking for the next opportunity, Ross, you know the way I'm wired. So when I look at these market dynamics underway right now, yes it's going to become a little bit more challenging for current property investors to hold their portfolio. They just need to be aware of what's going on and work out what the contingencies are. But what it might do is slow a lot of people from securing more investment properties. And obviously this is one of the effects of what APRA's trying to implement.
So for myself as a property investor ... And you're already seeing now, to your point, rents are starting to go up, which is always an indicator of perhaps a little bit of a slowing in investors buying property. For me, for us, for our listeners, is now a good time to be thinking about purchasing? Because in markets like this, opportunities arise. When it's harder to get financing, it means there's less people in the marketplace. If there's less people in the marketplace, there might be less positive pressure to be putting on prices. So how do you get ready to capitalise on this? Do you got to get a pre-approval sorted in the current market? What would you do?
Ross Le Quesne: Yeah, definitely. So review your finances. If you are in a position, and you've got all the buffers and you need to ... I say, it's a long-term investment and the way to make money in property is to provide those under value opportunities. In a slower market, there is more under value, under market opportunities. So definitely, for some investors it's a fantastic opportunity to look in certain marketplaces.
Phil Tarrant: Okay, so for this bonus episode, and I'll conclude on this, number one, understand what's going on, and work out how it affects you, and speak to your broker or accountant or whoever helps with your finances. If you deal directly with a bank, go in and have a chat with them and actually understand what's going on. But number two, is there opportunities in this marketplace for yourself as an investor, and how do you take action? So you need to understand your ability to secure finance at this point in time and over the next 6-12 months.
Ross Le Quesne: Yeah, and to ensure that you've got the ability to then hold that property long term.
Phil Tarrant: Absolutely. Okay. Good. I enjoyed it. I hope that helped everyone. I find it quite intriguing how all these different moving parts can influence the directions of markets.
Ross Le Quesne: Yeah, definitely, as mortgage brokers it keeps us on our toes, and it's always interesting. But it's great to be able to work with people and help them through the maze.
Phil Tarrant: Nice one, Ross, appreciate your insights. Thanks for tuning in, everyone. Remember to check out smartpropertyinvestment.com.au, we're on all the social stuff if you want to follow us, Facebook, Twitter, LinkedIn. If you want to come on the show, happy to get you on here. Contact the team: [email protected] And please do keep those reviews coming on iTunes. I do appreciate them and the more reviews we get, the more we can open up the podcast to more investors looking to create sustainable wealth through property. We'll be back again soon. See you later. Bye bye.
Disclaimer: The information featured in this podcast is general in nature, and does not take into consideration your financial situation or individual needs and should not be relied upon. Before making any investment, insurance, tax, property, or financial planning decision, you should consult a licenced professional who can advise whether your decision is appropriate for you. Guests appearing on this podcast may have a commercial relationship with the companies mentioned.