25 September 2018
Over the past six months, grey clouds have been building in the distance for borrowers, and for many, the brewing storm is yet to hit in full force.
Australia’s current lending landscape is a tough one. Moves by legislators and regulators to kerb borrower enthusiasm have created headaches for those now looking to build a
That said, there is opportunity ahead for those able to weather the challenge.
The state of play
The runaway nature of Australian property prices in Sydney and Melbourne from 2012 was causing concern for legislators.
It was claimed investors were taking up all the stock and isolating first homebuyers from the market – and there were no indications things were going to slow down.
In 2014 the Australian Prudential Regulation Authority (APRA) responded by instructing banks to cap growth in investor lending to 10 per cent of their total loan book.
An additional move in 2017 by APRA required banks to keep interest-only loans to less than 30 per cent of their mortgage portfolio too.
While both these measures were said to be temporary – in fact, the first has been recently relaxed – they appear to have done their job too well with investor-loan growth now at single-digit percentages.
Add to the mix the current banking enquiry. It’s findings so far have levelled criticism at bank practices.
To compensate and prepare for the eventual recommendations, lenders are already tightening their requirements from borrowers – particularly investors.
The upshot is that getting a property loan approval at the moment is tough.
It’s been a fast turnaround too. Whereas six months ago a bank customer might have been approved to borrow $800,000, nowadays that same client might be lucky to get $500,000.
That means many who contract to purchase based on a pre-approval gained under the old guidelines, will find their application knocked back under the bank’s new rules.
Another reason for impending mortgage stress is many loans are about to roll over from Interest-only to Principal-and-Interest in the next 12 months.
This means higher repayments for some already stressed borrowers.
These customers will have little choice but to accept the new loan terms being offered by their current lender, because competition for interest only lending will be virtually non-existent.
Here’s the perfect storm scenario:
- The cost of money will go up,
- The availability of money will drop,
- And, in certain markets, value growth will be non-existent for a number of years.
Is there opportunity?
In short – yes, but it’ll be those who got their affairs in order early who’ll benefit most.
Investors who’ve built a resilient portfolio are certain to take advantage.
Your investment strategies must be long-term so you can smooth out the peaks and troughs of market and finance cycles in order to secure your future for decades to come.
1. Have impeccable records
Now more than ever, it’s important to have kept your financial records in tip-top order.
By this, I mean you need to know your numbers inside and out, and back to front.
It all has to be documented as well. Not so long ago, for example, it was acceptable to front up to the bank with little more than your estimated living costs and gross income, and with a signed statutory declaration as back up.
Nowadays, it’s a case of being able to account for every dollar. You may have put “Annual clothing allowance – $1000” in the loan application, but today’s banking credit departments are checking your credit card statements as well.
They know your Gucci shoes and Burberry briefcase cost twice that, and they’re willing to say, “No!”
Having impeccable records means you can accurately account for every dollar.
It also demonstrates to the bank that you can stay on top of your loan commitments.
Being a good customer really can pay dividends in these trying times.
2. Maintain cash flow
Cash flow is king when it comes to loan serviceability, so if you’ve built a multi-property portfolio, make sure your income isn’t overextended.
Key to this is portfolio diversification. We always recommend maintaining a buffer as part of your investment strategy because changes in interest rates, personal circumstances and the cost of living are inevitable.
In addition, banks are now upping their ‘stress test’ on client’s finances – increasing their own interest rate and cost tolerances on your supplied numbers.
Being on top of your cash flow can be the difference between a yes or no on your next loan.
3. Equity buffer
Along with cash flow you must maintain an equity buffer as well.
Having adequate equity is essential to a lender’s requirements.
The problem that often occurs during a period of high property value growth (like recently) is some owners use their new-found equity on unproductive debt.
They might spend up big on their credit cards and then consolidate that debt into their house loan.
While they’re at it, they might get a bit extra from the bank in order to buy a new car or go on holiday.
These borrowers are not allowing for the future and have effectively re-bought their property off the bank at today’s prices because they ‘feel wealthy’.
The best opportunities are there for those who have liquidity in their equity.
I’m a big believer in making your money work for you and if your equity isn’t liquid, you can’t capitalise on opportunities when they arise.
Building a resilient portfolio in times of great growth is essential so you not only survive any eventual slowdown, but can pounce on newly revealed profitable prospects.
If you’ve failed to prepare for our new, tougher financial times, now might be the chance to catch your breath, talk to an expert strategist and plan for the cycles next turn.
After all, the state of your wallet dictates the state of your mind.
16 July 2018
Be a smart investor and have a loan strategy.
You have saved away and have enough cash to consider purchasing property as an investment. Like any purchase, it is a huge one so having a strategy in place will keep you focused and ensure that you are doing as much due diligence as you can for a successful investment.
Not many successful investors became successful by accident – we recommend you start by seeking professional financial advice to really determine what your borrowing capacity is and how realistic your investment is.
Debt does not have to be scary, unless it is the wrong type of debt. In an ideal situation, you will want your debt to be productive and if you have planned how your cash flow will be affected, then you can have a clear understanding of how purchasing that next investment will affect your lifestyle. Productive debt in our eyes can be used as an advantage to buy an asset or generate income such as rental income.
Understanding your loan strategy
If you are looking to invest in multiple properties, we think it’s important to understand the short and long term perspective of property ownership. You have to think about how this next loan or investment is going to influence your life and your cash flow as well as what the situation might look like with your third or fourth investment. We say this as it can really make a difference in the type of property you purchase in the first place.
Think about how positively or negatively geared loans will affect what you purchase or how you live in the future. It may seem odd to be thinking so far in advance, but we think it is important to really understand your financial situation and also the results you would like to achieve as a property investor.
This is where we think it is important to be surround by the right advice. The right financial advisor for you will be able to help you plan the various scenarios to suit your end goal – after all everyone has different goals in their lives.
30 January 2018
Author: REIWA President Hayden Groves via reiwa.com.au
After a solid couple of years of subdued conditions in the Perth property market, we can look back on 2017 as a transitional period that brought about the bottom of the market.
Coming off the back of a very soft 2016, the Perth property market regained its foothold in 2017, with stable listings, sales and median house price levels observed.
The stability we are now witnessing across key market indicators is a welcome change.
What to expect in 2018
The forecast for 2018 is that the Perth market will moderately and steadily improve, however REIWA cautions against expectations of rapid growth in either the established housing or rental markets over the coming year.
In 2017 there was an average of 489 property sales recorded each week, which REIWA forecasts will lift to approximately 500 sales per week over the next six months. If sales volumes continue to trend at current levels, listing volumes will begin to fall, creating upward pressure on prices as demand builds.
We saw listings for sale start to level out and decrease last year, peaking at just over 15,000 in early 2017, before reaching a low of just over 13,000 in September.
With new dwelling activity set to decline in 2018, REIWA forecasts the number of properties for sale in Perth to remain at current levels over the next year, a level commensurate with market parity.
Perth rental market
Perth’s rental market also appeared to turn a corner in 2017, with listings declining from 11,000 in January to just over 9,300 by December.
Over this same time, leasing activity levels were strong, with approximately 1,180 rentals leased each week. If this trend persists, the balance between supply and demand of stock will continue to improve in 2018.
In a welcome change for investors, Perth’s median rent price has stabilised at $350 per week since April last year. While we don’t anticipate there will be significant growth to median rent prices in 2018, they’re not likely to fall either with quality family homes in particular in strong demand.
The Perth market is no longer experiencing significant declines in median house and rent prices, nor are we seeing listings for sale and for rent increasing at the rate they once were.
As market conditions improve and confidence returns, competition among buyers will inevitably increase.
If you’re thinking about purchasing your first home, trading-up or investing in property, my advice is to act sooner rather than later and take advantage of the stable and favourable market conditions.
To discuss your valuable investment with our Business Development Manager Sarah Morgan, give us a call on 9475 9622