It sometimes feels like the banks are making it more and more difficult to secure lending, particularly for investors. The fact is, the banks have certainly tightened up their lending criteria – not because they like to make things difficult for everyone, but to help us as a nation, weather the storm of predicted financial crisis by taking action to reduce the national level of household debt.
Negative gearing
Last year Bankwest took the dramatic step of removing negative gearing tax gains from its loan applications. Having already pulled the plug on new lending to investors, the bank – part of the Commonwealth Bank – no longer allows predicted tax refunds from losses attributed to an investment property to be included in loan calculations. Of course, you will still benefit from the practise of negative gearing, but it just won’t be factored into your mortgage application – essentially meaning you can borrow less.
This was a brave move from Bankwest, as other lenders didn’t follow suit as anticipated, but it was a responsible move. Any investor requiring negative gearing to get their loan over the line is a more risky proposition and you would be smart to omit this from your own calculations whichever lender you decide to go with to make sure you can service your loan comfortably.
Why the crackdown on investor lending?
The banks have certainly tightened up their lending criteria as a whole – but they are actually taking positive, preventative steps to avoid a potentially significant over-lending crisis and putting the brakes on investor lending is an inevitable target area.
So what does this mean for investors?
Over the past couple of years, banks have faced tougher regulations aimed at investor lending, including lower LVRs (Loan to Value Ratios) – the proportion of money they will lend for a home loan compared to the property’s value – meaning you will need to put down a larger deposit. Lending limits to property investors are capped at a growth rate of 10%. Once a bank hits or nears that limit, it is obliged to put a temporary hold on all investor lending until that percentage drops. This means you will have to shop around more to find the right loan for you – using a broker will be helpful as they keep abreast of the whole market and often have access to niche lenders.
The tightening of restrictions, including higher interest rates and increased LVRs on interest only mortgages has also had its impact on investors and owner-occupiers alike (as many owner-occupiers have overstretched themselves purchasing their family home on interest-only mortgages). Lenders are also now looking for evidence that investors, as well as owner-occupiers, have plans to reduce their overall debt. So you may well need to consider a principal & interest repayment mortgage for your investment loan as opposed to interest-only.
While property prices are still buoyant in Melbourne and Sydney, in other parts of the country, especially in WA, prices have cooled and the banks need to safeguard against riskier lending. Putting the impact on your personal situation aside for a moment, think of the bigger picture – this tightening of the banks’ lending restrictions in general is a good thing and will ensure our economy and property markets remain vibrant and strong.
Well-informed investors with secure finances should not be deterred, as the property landscape will likely remain more fertile with these practice’s in place.
Thank you to our partner, Zippy Finance for their content contribution.
