While the Australian Prudential Regulation Authority (APRA) is continually making changes to lending rules to slow property investment, it seems that tenants are being forgotten. In fact, over the coming months, investor lending regulation changes are likely to push-up investor mortgage rates, which, in turn, will affect tenants as rate rises are passed on to them via rent increases.
What Changes Have APRA Made?
APRA introduced a 10 percent growth cap on Australia’s major banks for investor lending, and has ordered that the banks raise their capital holdings to reduce added financial risk. This has resulted in the Big Four Australian banks raising their investor loan interest rates by up to .25 basis points. Other lenders, such as AMP have raised investor home loan rates by .47 basis points in order to meet APRA lending guidelines and to reduce their annual investor lending growth rate.
How Have Tenants Been Affected By APRA Changes?
However, it seems that no-one has considered that the group mostly affected by APRA changes will be tenants. As a number of mortgage brokers have pointed out, the rapidly changing lending market and increases in investor home loan rates has affected a number of their investment clients, which, in turn, will affect the tenants of these clients. For instance, an investor with $1 million in property investment debt will experience an increase of $2,700 per year on their investment loan with a .25 basis point raise on their loan interest rate. This equates to an extra $50 per week needing to be found to meet home loan repayments, which is likely to be passed on to the tenant.
How Have Investors Been Affected By APRA Changes?
For investors who own multiple investment properties the cost is far greater with the recent hike made to investment loans. For instance, an investor with $8 million in investment property debt will face a $21,000 increase in loan repayments over a year with a .25 basis rate rise. This equates to $450 a week. The only way an investor can expect to cover this increase is to charge higher rents.
A number of mortgage brokers are saying that several of their clients with bigger investment portfolios are now beginning to feel the pinch of APRA changes to lending guidelines. Not only have lending rates risen for investment home loans, but investors also need to have a minimum of a 20 percent deposit and earn more to cover their debt. Therefore, in order for an investor to grow their property investment portfolio they need to have greater cash flow and earn more to meet existing guidelines.
A 20 percent deposit on a $300,000 property is $69,000. Plus, the investor will need an additional $10,000 to $15,000 to cover government costs and, lending fees and charges. In addition, rather than an investor needing an additional $45,000 in income to secure a million dollar loan, they now require double that amount or $90,000 in income to secure this sized loan. For investors with a portfolio of over $3 million, this means that the investor will need to earn an additional $120,000 in income to be approved. This is near on impossible to achieve.
How are the Changes APRA Have Made Affecting the Property Market?
The introduction of APRA’s 10 percent speed limit on investor lending has slowed the Sydney property market with a number of investors with higher loan-to-value ratios and a buying preference for outer suburban markets now beginning to sell and get out of the market. A number of realtors have said that they’ve also noticed a drop in their number of open homes over the last few weeks. According to realtors this is because many investors don’t have the cash to come up with a 20 percent deposit, most were using another property’s equity as security and as a result had high loan-to-value ratios, which are now no longer acceptable.
This is effectively penalising smaller property investors, such as mum and dad investors, who don’t have enough cash flow to make property investment in today’s market a reality. However, those who have greater equity and earn more, and have greater cash flow are able to continue buying. This trend has been confirmed by CoreLogic RPData where their recent figures reveal that out of a total of 2,615 capital city auctions ending 13 September, clearance rates had fallen into the 70 percent realm. Previous results had been in the high 80s. Therefore, recent rates had fallen below last year’s levels.
Traditionally, Sydney is Australia’s best selling home market, but it has recorded an auction clearance rate of less than 80 percent for the 10th consecutive week in a row. This is surprising given that Spring usually records higher buying activity. Therefore, it can be said that buyer sentiment has weakened with prices in some markets expected to plateau. Many real estate experts expect that the recent APRA changes are beginning to alter buyer and seller behaviour.
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Written by eChoice
Since 1998, eChoice has helped more than 50,000 Australians secure a home loan through its network of over 25 lenders and hundreds of loans. Best of all our service is cost and obligation free!