How the new serviceability assessment affects investment lending

These policy-driven changes have taken some of the heat out of the two biggest property markets in Australia, all while changing the way investors acquire and hold their assets and ultimately grow their wealth. Nowadays, financial planning has never been more critical in the process of capitalising on the fluctuating market.

According to mortgage broker Marissa Schulze: “There will be a lot of great opportunities for particular investors moving forward if you get yourself into a position to be able to capitalise on those opportunities. But certainly, because of the Royal Commission and the APRA review, we have seen a lot of changes to lending policy over the last 12 months.”

“It is possible that we're going to continue to see some further changes and some further tightening over the next 6 to 12 months before we reach a new level of normality. At this stage, borrowers really need to be aware of what is going on and the real variance between policies amongst the different lenders.”

Moving forward, property investment will become a new, fiercer game of finance that will entail a deeper understanding of mortgages as the policy changes impact property market values and ultimately affect both investors and home buyers across the country.

Lending standards

As it gets harder to acquire financing for property investment, investors are strongly advised to study the new criteria for mortgage application assessment.

Banks and other lending institutions now focus mainly on responsible lending. Recently, they have been examining the applicants’ living expenses and making sure that they understand their expenditures before deciding on offering home loan products.

Traditionally, borrowers use the Household Expenditure Method as a baseline for determining the living expenses based on the size of the household. Nowadays, they must have a good grasp of their expenses in order to have their mortgage applications considered—down to the smallest coffee and the cheapest app subscriptions.

“Lenders are asking for a detailed declaration of the living expenses of borrowers and that can be tricky because not all borrowers actually understand their living expenses, which is part of the problem. They will look at credit card statements and bank statements to verify that what has been declared is fair and reasonable, ” according to Ms Schulze.

Apart from scrutinising living expenses, most lenders have also begun operating on higher assessment rates, considering interest rate forecasts as much as the current rates. They could also require you to declare expenses related to holding a property investment, if applicable.

Some lenders only consider 80 per cent or less of the rental when they assess serviceability, while other lenders could remove or reduce negative gearing from their servicing calculators.

Being aware of these specific standards that may differ from one lender to another can definitely help investors make solid mortgage applications and ultimately find the mortgage deal that will allow them to maximise their earning potential.

Ms Schulze said: “Managing your finances is something that you really need to be proactive about. Definitely, having a broker on your side that really understands this space can help you take control of your investment.”

Conservative borrowing

While the lending interventions are going to make mortgage applications more complicated, Ms Schulze said that this ‘new norm’ will be a great opportunity to make responsible borrowers out of Australians, both investors and home buyers.

At its simplest, the implementation of stricter lending regulations is to make sure that only those who can afford a mortgage—fluctuating interest rates considered—are allowed to borrow.

According to Ms Schulze: “You should really look at what you're spending and understand where your cash is going so you can see where you can cut back. Being able to demonstrate a lower living expense can help you increase your borrowing capacity.”

Moving forward, the mortgage expert believes that being more conservative borrowers is one of the best strategies for investors who are looking to continue growing their portfolio amid a fluctuating property market—that is, to lower expenses, chase better yield and ultimately improve their cash flow while also establishing a substantial cash buffer.

The consideration of living expenses could reduce someone’s borrowing capacity by 40 per cent, which is why borrowers should focus on maintaining good cash flow in order to avoid having their wealth-creation journey slowed down.

Ms Schulze said: “Review your living expenses, see where they can make changes to how they're living and just establish a good money management practise. Build cash buffers to ensure that they do have a little bit extra and forecast your repayments based on the higher interest rate and what's gonna happen in the future.”

“The Australian property market is still well placed to continue moving forward and growing in the future, so I'm not concerned about what impact the policy changes will have. It's just a matter of making sure that you protect yourself against them,” she concluded.

Tune in to Marissa Schulze's episode on the Smart Property Investment Show to know more about securing finance in the current property market.