APRA lending changes to come

11 Jan 2015

First posted on Somersoft.com.au

The lending environment is tightening in 2015 following APRA’s latest actions in late 2014 (a cautionary word to the banks).

In the year ahead, I expect a ‘gradual tightening’ in lending policy to occur. Credit growth is set to continue in 2015 and potentially accelerate past the 10% investor benchmark that APRA have set. Having worked at the one of the key regulators on macro-prudential policy, they have started game-planning a ‘tightening’ strategy that can be implemented over time. A few observations on how this may play out:

• Cash outs at LMI will become increasingly difficult.
• High LVR interest only repayments for PPOR’s. I think this will become trickier. I suspect it will be treated harsher as part of credit scoring models too.
• Extending interest only periods. APRA don’t like this at all. This may mean refi’s out to external banks to get around it, but the non-amortisation of loans is a big fat NO for prudent lending standards.
• Potential tightening to serviceability calculators.

Who this effects? The SS community is full of very experienced investors with large portfolios. But where it’ll do most damage are the ‘aggressive’ investors in the property accumulation phase. Some examples of where I’d advise some tweaks to finance strategy are:

1. Buy/Reno/Hold, rinse and repeat, investing strategy: This is a common and powerful equity creation model. For those with equity, a powerful way to do this is borrow at 80%, do the reno, then valuer shop and refinance and cash out to a higher LVR.

• With cash outs being targeted, this could impose finance risk and the benefits need to be considered against possible changes in cash out policy in the future.

2. Paying down non-deductible debt to cash out deductible investment debt: Also a great tax/finance strategy which involves paying down and cashing out from a PPOR, likely to be at I/O terms.

• Depending on the investing strategy, I’d say proceed with caution. There’s a finance risk that you might not be able to cash out after paying your PPOR down.

3. PPOR purchases: If you’re purchasing at a high LVR, you may have to pay P&I repayments with lots of lenders soon.  

4. Investment loans, pricing:Lots of lenders already charge interest rate premiums for higher LVR loans. I think this may happen with more lenders and to a greater extent as banks could be forced to hold higher capital amounts against this type of debt.  

5. Investment loans, serviceability: One of the biggest threats to borrowing power is changes to serviceability calculations. I won’t be surprised if a higher assessment rate is used for investors with multiple IPs soon.

• The biggest red flag for property investors with multiple IPs would be a mandatory assessment buffer used for other financial institution debt. I’ve heard whispers of this from regulators and lenders already. If this happens, it will really shake up the ‘ordering of lenders’ model used to maximise borrowing power.

This isn’t supposed to be a ‘doom and gloom’ post, just a realistic assessment of what’s happening based on my time as a policymaker and as a broker. There’ll be workarounds for some of these, but will likely involve some sort of cost (different lender, higher price, etc).

I think it’s important for investors to be ‘ahead of the curve’ and start shifting their portfolio behaviour to match future changes in the lending environment. Some would disagree with me here, but it’s better to be on the front foot and prepare for it than be ‘stuck’ trying to respond. 

Overall, I’d say to those in the aggressive investor category, take the money when it’s available to you and run! For other investors, it might be worth making some slightly more conservative assumptions in your finance plans.