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Tightened Lending Conditions: Hidden Opportunities For Investors

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Tightened Lending Conditions: Hidden Opportunities For Investors

Tightened Lending Conditions: Hidden Opportunities For Investors

With the latest ABS figures for 2015 showing that the number of loans to investors had dropped by 2 per cent nationally, it was easy for market speculators to conclude that this was purely as a result of tightened lending conditions by the main banks following a ‘boom’ period in the property market.

Other commentators found further fuel for this argument in the fact that loans to owner occupiers over the same time frame late last year remained virtually unchanged nationally, however according to Aviate Group Managing Director Neil Smoli, there is much more to this figure’s consistency than most would care to uncover.

“When most banks and lending institutions issue quarterly data outlining owner-occupier to investor lending ratios, you’ll most often find that the definition of ‘owner-occupier borrowing’ also includes a few less serious debt categories, such as loans taken out by owners in occupancy to either extend or renovate existing mortgaged homes,” he said.

Mr Smoli believes that the recently tightened borrowing conditions for investors can also be viewed as a blessing in disguise, not only for first homebuyers – as many are speculating, but also for more strategic investors looking at any potential property investments with a long-term view.

 

“For a time, investors were becoming accustomed to LVR rates well below 90 per cent, but as we are seeing now,more and more lenders are bringing their LVR requirements for investors back to the 90 percent mark.”

 Tightened Lending Conditions: Hidden Opportunities For Investors

“Thus, not only is it possible that you might get your investment property for less than expected, meaning you may even be able to borrow less, but you’re also likely to benefit from interest rates that are widely to stay the same or drop even further in 2016, not to mention come up against far less competition on auction day.”

In relation to recently released CoreLogic RP Data figures that revealed the national rental market posted an increase of just 0.3 percent in 2015, a record-low since records began in December 1996, Mr Smoli said this only reinforces the need to take a long term view with any property investment.

“Again, figures such as those released by CoreLogic RP Data require a level head and certainly some market knowledge – or good advice from your experienced adviser, who would almost certainly agree that the glum numbers come with a definite silver lining for investors,” Mr Smoli said.

“Furthermore, we always urge our clients to take a strong interest in the fine print – in this case, a more in-depth look at the figures and their breakdowns, as renting Sydneysiders and Melbournians both experienced a rise in rents of 1.9 and 2.2 percent, respectively.”

Mr Smoli concludes that for astute investors who follow proven steps in selecting an investments property, the current market – or any market which appears not to favour investors, should never be a deterrence, but a potential golden opportunity.

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Finance

One in five homeowners will struggle with rate rise of less than 0.5%

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ONE in five Australians are walking such a fine mortgage tightrope that they could lose their homes if interest rates rise by even 0.5 per cent.

Our love affair with property has pushed Australia’s residential housing market to an eye-watering value of $6.2 trillion.

But as we scramble over each other to snap up property while interest rates are at historic lows, we have gotten ourselves into a bit of a pickle. We might not actually be able to afford funding our affair.

An analysis, based on extensive surveys of 26,000 Australian households, compiled by Digital Finance Analytics, examined how much headroom households have to rising rates, taking account of their income, size of mortgage, whether they have paid ahead, and other financial commitments. And the results are distressing.

It showed that around 20 per cent — that’s one in five homeowners — would find themselves in mortgage difficulty if interest rates rose by 0.5 per cent or less. An additional 4 per cent would be troubled by a rise between 0.5 per cent and one per cent.

Almost half of homeowners (42 per cent) would find themselves under financial pressure if home loan interest rates were to increase from their average of 4.5 per cent today to the long term average of 7 per cent.

“This is important because we now expect mortgage rates to rise over the next few months, as higher funding costs and competitive dynamics come into pay, and as regulators bear down on lending standards,” Digital Finance Analytics wrote.

The major banks have already started increasing their home loan rates this year, despite the market broadly expecting the Reserve Bank to keep the cash rate steady at 1.5 per cent this year.

Just this week NAB upped a number of its owner-occupied and investment fixed rate loans.

“There are a range of factors that influence the funding that NAB — and all Australian banks — source, so we can provide home loans to our customers,” NAB Chief Operating Officer, Antony Cahill, said of the announcement.

“The cost of providing our fixed rate home loans has increased over recent months.”

So as interest rates rise and leave mortgage holders in its dust, it leaves a huge section of society, and our economy, exposed and at risk.

NOT TERRIBLY SURPRISING

Martin North, Principal of Digital Finance Analytics, said the results are concerning, albeit not surprising.

“If you look at what people have been doing, people have been buying into property because they really believe that it is the best investment. Property prices are rising and interest rates are very low, which means they are prepared to stretch as far as they can to get into the market,” Mr North told news.com.au.

But the widespread assumption that interest rates will remain at historic lows is a disaster waiting to happen, especially in an environment where wage growth is stagnant.

“If you go back to 2005, before the GFC, people got out of jail because their incomes grew a lot faster than house prices, and therefore mortgage costs. But the trouble is that this time around we are not seeing any evidence of real momentum in income growth,” Mr North said.

“My concern is a lot of households are quite close to the edge now — they are not going to get out of jail because their incomes are going to rise. We are in a situation where interest rates are likely to rise irrespective of what the RBA does … There has already been movement up.”

Australia’s wages grew at the slowest pace on record in the three months to September 2016, according to the latest Wage Price Index released by the Australian Bureau of Statistics (ABS).

And as a result Australia’s debt-to-income ratio is astronomical. The ratio of household debt to disposable income has almost tripled since 1988, from 64 per cent to 185 per cent, according to the latest AMP. NATSEM Income and Wealth report.

What this means is that many Australian households are highly indebted, thanks in large part to the property market, without the income growth to pay it down.

“The ratio of debt to income is as high as it’s ever been in Australia and there are some households that are very, very exposed,” Mr North said.

THE YOUNG AND RICH MOST AT RISK

This finding will come as a surprise: young affluent homeowners are the most at risk — it is not just a problem with struggling families on the urban fringe. When it comes to this segment of the market, around 70 per cent would be in difficulty with a 0.5 per cent or less rise. If rates were to hike 3 per cent, bringing them to around the long term average of 7 per cent, nine in ten young affluent homeowners would feel the pressure.

“It is not necessarily the ones you think would be caught. And that’s because they are actually more able to get the bigger mortgage because they’ve got the bigger income to support it.

“They have actually extended themselves very significantly to get that mortgage — they have bought in an area where the property prices are high, they have got a bigger mortgage, they have got a higher LVR [loan-to-valuation ratio] mortgage and they have also got lot of other commitments. They are usually the ones with high credit card debts and a lifestyle that is relatively affluent. They are not used to handling tight budgets and watching every dollar.”

And while the younger wealthy segment of the market being most at risk might not be of that much importance compared to other segments, Mr North said what is concerning is the intense focus on this market.

“Any household group that is under pressure is a problem for the broader economy because if these people are under pressure they are not going to be spending money on retail and the broader economy,” Mr North told news.com.au.

“The banks tend to focus in on what they feel are the lower risk segments and the young affluent sector has actually been quite a target for the lending community in the last 18 months. Be that investment properties or first time owner-occupied properties, my point is there is more risk in that particular sector than perhaps the industry recognises.”

TOUGHER HOME LOAN RESTRICTIONS NEEDED

Now an argument is mounting that Australian banks need to toughen up their approach to home lending.

“I think we have got a situation where the information that is being captured by the lenders is still not robust enough. I am seeing quite often lenders willing to lend what I would regard as relatively sporty bets … I’m questioning whether the underwriting standards are tight enough,” Mr North said.

This includes accepting financial help from relatives for a deposit, a growing trend among first home buyers.

“The other thing that I have discovered in my default analysis is that those who have got help from the ‘Bank of Mum and Dad’ to buy their first property are nearly twice as likely to end up in difficulty … It potentially opens them to more risk later because they haven’t had the discipline of saving.”

News.com.au contacted several banks for comment on whether they think a rethink of their underwriting standards is needed. Only one lender, Commonwealth Bank, agreed to comment, but remained vague on the topic.

“In line with our responsible lending commitments, we constantly review and monitor our loan portfolio to ensure we are maintaining our prudent lending standards and meeting our customers’ financial needs. Buffers and minimum floor rates are used when assessing loan serviceability so it is affordable for customers,” a CBA spokesman said in an emailed statement.

But Mr North said something needs to be done before we find ourselves in a property and economic downturn.

“I’m assuming that with the capital growth we have seen in the property market, it will allow people who get into significant difficulty to be able to get out, however, it’s the feedback concern that I’ve got.

“If you have got a lot of people in the one area struggling with the same situation, you might see property prices begin to slip. If we get the property price slip, and we get unemployment rising and interest rates rising at the same time, we have that perfect storm which would create quite a significant wave of difficulty.

“We need to be thinking now about how to deal with higher interest rates down the track. We can’t just say it will be fine because it won’t be,” he told news.com.au.

Originally Published: http://www.goldcoastbulletin.com.au/

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Finance

Latest Numbers Show Lift In New Home Lending

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The latest ABS housing finance figures show the number of loans to home buyers declined in August 2016, although lending improved modestly towards building purchasing new homes.

The Housing Industry Association revealed in total, there were 34,349 loans to owner occupiers purchasing homes (excl. re-financing) during August 2016, which is down by 1.3 per cent on July’s result and is 7.4 per cent lower than the number recorded in the corresponding month last year.

Lending to households building or purchasing new homes fared a little better during the month. The number of loans for construction increased by 3.7 per cent in August, but was still 1.7 per cent down on the level recorded year ago.

The number of loans for the purchase of new homes was essentially unchanged in the month (-0.3 per cent) at a level 5.7 per cent higher than a year earlier.

“It is pleasing to see lending in the new home market holding up in an environment where we are seeing the number of loans to home buyers easing across the housing market more broadly,” said HIA Economist Geordan Murray.

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“Looking more closely at lending for new homes, the number of loans for construction has been gradually trending down since late 2014.

“This segment of housing finance is closely aligned with the detached house building market and lending activity has been generally consistent with expectations given the level of detached house activity,” he said.

“In contrast, the number of loans to those purchasing newly built homes has been steadily trending higher. It is in this segment of housing finance that we will see evidence of the lending activity related to the boom in apartment building, but the figures are yet to fully reflect the record level of construction activity.

“As the large numbers of apartments purchased in projects that are currently under construction reach completion over the next year, we should anticipate the number of loans in the segment of the market to increase quite significantly – particularly in New South Wales and Victoria,” Mr Murray said.

Original article published at www.theurbandeveloper.com  by Staff Writer 11/10/16

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Westpac happy to again take 10 percent deposits for investor loans

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Westpac, the country’s biggest lender to landlords, is lowering the size of the deposits it will require from property investors.

The decision partially reverses last year’s crackdown.

Westpac and St George has told mortgage brokers the maximum loan-to-valuation ratio (LVR) for new mortgages for property investors would rise to 90 percent, up from 80 percent.

The change means property investors need a deposit of 10 percent of a property’s value, compared with 20 percent previously.

Fairfax Media reported Westpac’s lending to investors grew only 7.2 percent in the year to March, down from growth of more than 11 percent in the first half of 2015.

The LVR changes bring Westpac into line with rivals.

Aside from Westpac’s move on LVRs, banks are offering more competitive interest rates to property investors, with St George on Monday offering cut-price variable home loan rates of 4.24 percent for investors.

Westpac’s move marks a partial reversal from the industry-wide clampdown on investor lending last year, triggered by the Australian Prudential Regulation Authority which was seeking to limit growth in lending to investors to 10 per cent a year to cool the heated property market in Sydney and Melbourne.

Originally Published On: http://www.propertyobserver.com.au/

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