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Tighter lending regulations have rendered some investors unable to grow their portfolio, but experts believe that even in its softening phase, the Australian property market is abundant with opportunities. Mortgage expert Marissa Schulze shares tips on navigating a market in flux.
As Sydney and Melbourne begin to see declines following an unprecedented property boom, most people have been inclined to expect the worst from the Australian property market—dwelling values going down by 40 per cent and the subsequent collapse of banking institutions and crashing of the national economy.
While most of these doom-and-gloom headlines are unlikely to come true, it’s undeniable that the property market is currently in flux.
Over the past months, regulatory bodies have intervened with investment lending to try and slow down lending and ultimately alleviate the growing affordability issues across the country, particularly in major capital city markets.
For instance, the new criteria for the assessment of mortgage application require applicants to provide a detailed declaration of their living expenses, complete with proofs such as bank statements. Other lenders have even started to operate on higher assessment rates.
According to Ms Schulze: “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, she strongly advised investors to take a moment to understand the changes in the lending environment before making any major financial decisions.
“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. Borrowers just really need to be aware of what is going on and the real variance between policies amongst the different lenders.”
While it’s definitely going to be harder to acquire finance for investment properties moving forward, Ms Schulze reminds investors that there will always be wealth-creation opportunities for those who know where to look.
After all, Australia is not one huge property market but ‘markets within markets’. While there’s some heat to be taken out of Sydney and Melbourne, there are five more states and territories to explore, with thousands of cities and suburbs.
Tougher policies are likely to stay, but smart investors can continue to grow their portfolio by following an ‘age-old principle’: Buy what you can afford to keep.
Considering the state of the market and the policy-driven lending environment today, cash flow is going to be more critical to investment success, Ms Schulze said.
She highlighted: “I'm a big believer that you should never buy something that you can't afford to keep forever. Moving forward, that's going to be more important. You need to understand the cash flow of your properties and take into consideration the principal repayments.”
Due to changes in lending regulations, interest-only loans have become harder to maintain. As a result, investors are forced to transition to principal-and-interest loans (P&I) and deal with higher repayments.
Right now, principal-and-interest loans might just be the smarter choice despite being more expensive at the outset.
Ms Schulze said: “There's nothing wrong with P&I loans because they're getting a much cheaper interest rate, we're able to negotiate much better discounts with the lenders and they don’t have to worry about their repayments increasing substantially at some point.”
“It's just a matter of understanding the new rules and working with them so you can put yourself in the best position to take advantage of the opportunities.”
Where appropriate, she encouraged investors to engage mortgage brokers in order to have a better understanding of the current lending regulations that may affect their investment journey. Brokers can also help investors negotiate the best mortgage deals and ultimately maximise their wealth-creation opportunities.
Amidst the tighter lending environment, being able to choose the right home loan can spell the difference between success and delays in an investor’s journey.
Both interest-only and principal-and-interest home loans are viable options for investors. It’s only a matter of determining which of the two fits your profile—from your goals to your financial capabilities and limitations in the short-, medium- and long-term.
Have a talk with financial advisers and mortgage experts to understand the difference in interest rates and mortgage repayments and ultimately see which home loan and features are right for you.
“It's just a matter of ensuring that you're getting the right advice and you're being really proactive about managing your finances, managing your debt, managing your debt structure and your property portfolio,” Ms Schulze said.
Like choosing a property to buy, picking the right home loan comes down to one important question: Can you afford to keep it?
According to the mortgage expert: “The real difference here is the cost. Can you afford to keep it if it's P&I? Can you afford the out-of-pocket cost? You've got to take everything into account, such as the ratio of good debt to bad debt, your personal plan and investment plans moving forward. There's lots of considerations.
“Hopefully, with these changes in rules, people are encouraged to get more in tune with their money management and property investment management. Hopefully, it helps them to be more in control of their finances and set themselves up for success in the future,” she concluded.