One of the biggest themes in the property market over the past year has been the tightening of the credit environment, and experts believe that the challenges could persist in 2019. How can investors navigate the mortgage landscape this new year?
Most experts believe that property financing may get relatively easier in 2019 following the conclusion of the banking royal commission last year and the removal of the interest-only lending cap by the Australian Prudential Regulation Authority (APRA).
However, while homebuyers will once again have more options for financing, the conservative lending practices are likely to stay, ultimately influencing access to credit.
In particular, serviceability assessment will continue to focus on living expenses, according to mortgage broker Ross LeQuesne.
“We're getting emails almost weekly with benchmarks changing—basically a lot more scrutiny on people's living expenses. It's not getting a lot easier.”
To promote responsible lending, banks and other lending institutions examine the applicants’ living expenses—taking the necessary steps to understand their expenditures before deciding on offering home loan products.
Where borrowers used to depend on the Household Expenditure Method as a baseline for determining the living expenses based on the size of the household, they must now be able to justify their expenses in order to have their mortgage applications considered—down to the smallest coffee and the cheapest app subscriptions.
“There is talk from the government telling the banks to ease up their credit guidelines. But, as we know, to implement changes within banks, it takes some time. Similarly, to pull back those changes made years ago in order to free up the credit markets, it's going to take some time,” Mr LeQuesne highlighted.
For investors keen to access financing for the growth of their portfolio this new year, Mr LeQuesne strongly encouraged good budgeting.
With the rigorous serviceability assessment and other conservative lending practices still prevalent across the market, ensuring that their cost of living is in line with their household budget and, therefore, justifiable will ultimately help investors come loan application time.
“As a property investor, you need to stick to a budget and ensure your spending is in line with that budget because the banks are going to be looking at that.”
“Your personal monthly balance sheet needs to look pretty good,” according to the mortgage broker.
Simply put, avoid spending more than you earn and save as much as you could to ultimately improve serviceability, Mr LeQuesne reiterated.
He said: “Just looking at the basic things like: What are you spending around? What are some of the areas that you can potentially pull back in? What are some of the credit card limits that you're not using? What's some of the higher interest personal debt like car loans and credit cards that you can pay off and cancel? What are some of the practical things that you can do to increase your serviceability yourself? What's in your control?”
To back up the claim about living expenses, he recommended keeping records and documentation from as far back as 12 to 18 months.
As the property market continues to change, spurred by the softening of the markets of Sydney and Melbourne after following an unprecedented property boom, Mr LeQuesne believes that the conservative lending practices will remain.
In light of the recently concluded banking royal commission and the market fluctuations, regulatory bodies deem it critical to make responsible borrowers out of Australians, both investors and home buyers.
Basically, they want to establish that only those who can afford a mortgage, considering fluctuating interest rates, are generally allowed to borrow.
Therefore, at the end of the day, while the stricter serviceability assessment may present a challenge to many, investors who have strong serviceability and a good buffer for their portfolio will have no trouble getting a home loan this year—even in Sydney and Melbourne.
“The thing that a lot of people forget is that, over the last 10 years, those properties in Sydney and Melbourne have gone up by about 80 per cent, then we had 15 plus-percent in three consecutive years. We didn't expect that it would continue to go but it did, right? So, the fact that it's coming off, to me, isn't that big a deal,” Mr LeQuesne said.
Apart from being money-smart and maintaining good serviceability, smart long-term strategies will also be the secret to property investment success in 2019.
“If you've been one of these investors that have bought at the peak of the market and then you're looking to buy property number two or property number three, you're going to make it more difficult because you haven't had that same growth in property.”
“In some cases, if you bought at the peak of the market, your property is going to be worth less than the price that you paid for it. Those investors will definitely struggle to go on to property number two and property number three, particularly if they want multiple properties and larger loans.
“At the end of the day, we find that, for the average income earner, the ability for them to borrow money in this market is still as good as ever,” Mr LeQuesne concluded.