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Investors who have 'made it big' are considered to be high risk by the banks. Why is this, and what can you do about it?
Blogger: Otto Dargan, director, homeloanexperts.com.au
Have you 'made it' as a property investor? Do you own 10, 20 or 200 properties?
Firstly, well done! You probably don’t hear that enough. Secondly, watch out!
When investors get to this stage, they tend to feel invincible. This is actually the time when you could be most vulnerable.
The banks know that you are a higher risk
In fact, they have special lending policies specifically for investors who own half the monopoly board. They don’t make it easier for you to borrow money, they make it harder.
Let’s have a look at what those risks are and how you can take them into account when you choose how to invest.
The way that banks calculate serviceability varies quite a lot. For investors with lots of properties, it becomes particularly important as many of your loans are interest only yet the banks assess your loans using a higher assessment rate and principal and interest repayments.
They are stress testing your portfolio in the event that rates increase. We can just apply with a lender that assesses your existing loans using your actual repayments and you can borrow as much as you need. But that doesn’t change the actual risk to your situation.
Rates can and will go up one day. While we recommend that you play it safe, if you are maxing yourself out then you must have funds on standby and you must be willing to sell properties quickly if you get into trouble.
The bigger your debt, the better your serviceability must be.
The LVR or percentage of the property value that you are borrowing should be lowered as your portfolio grows.
Borrowing high LVRs works well to get started, but with a big property portfolio it is a death wish.
As a rough guide Investors should limit themselves to 80 per cent LVR if they owe over $3 million, 70 per cent if they owe $5 million and 60 per cent or less if they owe over $10 million. That’s the limit, lower is better for most people.
The banks worry about their total exposure with you as a client. Particularly if you are borrowing more than 80 per cent LVR.
You should also worry about your exposure to just one bank!
Ideally you should spread some of your debt between several lenders or if you do put all of your loans with one lender then don’t cross securitise your properties and make sure that you wear the pants in that relationship. Make sure that if you need to walk that you can.
If you own several units in one complex, or a lot of properties in one suburb, then the banks will worry about your concentration risk. That’s a fancy way of saying 'you have all of your eggs in one basket'.
Spread out your properties and you’ll lower your risk.
If you rely heavily on your rental income to service your debts, then some banks will be hesitant to lend to you.
In particular if you have commercial properties and they become vacant then you need to have a plan B. Keep in mind that banks can often pick which property that they sell… and it is easier to sell your residential home than a vacant commercial property.
Having cash on standby in an offset account is the best insurance of all.
Relying on capital gains to make repayments
Are you increasing your loans, releasing the equity and then using this money to make repayments? Don’t. No really.
Properties don’t always go up and, unless you have a significant amount of equity, this is just too risky!
Risk versus reward
When you were starting out as an investor you may have taken more risks. When you are bigger you should shift your focus and play it safe.
Professional property investors are in it for the long term and manage the risk of their investments rather than ignoring them.