By Victor Kumar
Over recent weeks, a number of lenders have announced a tightening of their home loan criteria, especially for investors.
This is mainly due to a big stick being waved by the Australian Prudential Regulation Authority (APRA) because of concerns about the continued strength of the property markets in Sydney and Melbourne, in particular.
However, there is another lending issue on the horizon that not many people are talking about.
Many investors and homeowners are now coming off the fixed rate or three to five years of interest-only home loans and not realising that they will likely have to start paying principal and interest.
If their cash flow is already borderline, then they may well be in trouble.
Portfolio lending worries
Under previous lending environments it was relatively easy to roll mortgages from a period of interest-only to another extended timeframe of the same repayment requirements.
Today, most lenders are moving away from that in a bid to rationalise their books under the new APRA guidelines.
So, if investors aren’t starting the conversation with their lenders early enough, in the current landscape they may get a surprise when they’re unable to take out another interest-only loan on their existing mortgages.
In fact, if the mortgages are automatically rolled over to principal and interest repayments, many lenders are reluctant to roll them back to interest-only at all.
A new landscape
There are not enough people talking about these lending changes in my opinion – especially given the restrictions on investor refinancing already announced by some of the major banks – which might result in some people being left with nowhere to go even if they wanted to.
Investors also need to be mindful of the potential for interest rate rises in the medium-term because if their property loans have also become principal and interest, then it will be a double-whammy which will start impacting their lifestyles and they may end up selling.
About 73 per cent of investors only own one property, often because that property wasn’t investment grade in the first place and it costs them a lot of their own money to hold it.
Of course, any increases to interest rates or forced moves to principal and interest loans could heavily impact on the vast majority of these types of investors.
The key to navigating the current lending landscape is to start talking to your bank early – at least two months before the expiry of your current interest-only loan periods.
If you’re interested in refinancing and you’re using a mortgage broker, ensure you’re working with someone that has connections with a variety of banks, including second and third tier lenders.
As long as you at least have a 80/20 loan to value ratio (LVR), there are still lenders out there who are willing to work with investors and have interest-only products available.
The point is that you don’t want to get into a situation where you have to sell because of cash flow issues forced upon you by a compulsory move to principal and interest repayments.
Property investors in Sydney and Melbourne especially should also make the most of their increased equity positions, because the ideal situation is to have access to their money before they need it.
In my portfolio, for example, I keep it at an 80 per cent LVR, but as soon as I have, say, $100,000 in equity I draw out those additional funds into a line of credit or an offset account.
This gives me liquid cash which means I’m not constrained by the current lending climate and can fund any additional cash flow demands. One of the golden rules of investing is to have access to money before you need it, so always keep your equity liquid.
A moment in time
Finally, it’s important to understand that the lending environment is reflective of the current property cycle.
So, if we go back to 2006, there were 105 per cent loans available because the market was buoyant but interest rates were much higher than today and these products were designed to help people get into the market.
Now it is the flipside, where interest rates are historically low and the market in many places is running hot.
This has resulted in APRA wanting to slow things down, which they are doing by changing the eligibility criteria for lenders in a variety of ways, including increasing the cost of living calculations in line with your income.
My number one piece of advice is to do what you need to do so you can hold your portfolio for the long-term – including accessing your increased equity to act as a financial buffer.
By Victor Kumar