Recent Home Living Property Culture The Team North Shore Living
Recent Home Living Property Culture The Team North Shore Living


Written by Simon Orbell

Photos by Des Harris

Our friends at Smartmove Professional Mortgage Advisors keep our team up-to-date with the happenings in the world of mortgaging and finance. In this article Simon Orbell, the Director for Mortgage Advice talks to us about how the world of bank loans is changing. With APRA (Australian Prudential Regulation Authority) cracking down on the big banks and investors, Simon gives us the best tips and tricks for navigating the mortgage market.

Read more below.

Over the past 2 years or so, the Australian Prudential & Regulation Authority (APRA – the body that oversees banks & other lending institutions) has been putting the brakes on the banks and the way that they lend money to their customers.

It began with an imposed 10% limit on the growth in investor mortgages written by the banks. The banks took this opportunity to reprice investor loans, making them more expensive than owner occupied mortgages. Much to the dismay of APRA, the property markets in Sydney & Melbourne continued to see significant price growth.

APRA noted that the level of interest only mortgages was reaching levels at which they were uncomfortable so they imposed a second limit on the banks. This time the banks were not allowed to have the flow of interest only mortgages rise past 30% of all new mortgages written. Once again, the banks took the chance to raise interest rates for interest only and also investor loans.

Prior to all of the regulatory intervention, whether a loan was investment or owner occupied, interest only or principal and interest, there was no difference in the price paid by the borrower in terms of the interest rate. These days, an interest only investment loan can be over 1% higher than an owner occupied principal & interest mortgage.

Although the above changes have hit borrowers in their hip pocket, the other significant change in the lending marketplace relates to the way that banks assess serviceability of new lending approvals. The banks have 2 major checks when assessing borrowing potential – equity and serviceability. Now most Sydney based borrowers pass the first test (equity) with flying colours. The Sydney market has performed so well that many clients have plenty of equity that they want to deploy but restrictions in the second test have meant that this is much more difficult to achieve. The banks are now assessing existing debts and new debts at a benchmark rate of over 7% and based on principal and interest repayments. To give you an example of how this effects things, we have many clients with interest only investment mortgages under 4.5% paying interest only. The monthly commitment for a $500,000 loan at this interest rate interest only would be $1,875 per month. The principal and interest repayment for a $500,000 loan at 7.25% is over $3,400 per month (almost double the interest only repayment). This has a huge impact on borrowing power. For many investors, what they could have borrowed 2 years ago versus today is 50%-60% less.

Another marketplace that has been heavily impacted is the expat or “foreign income” market. The banks are shading the gross income by 20%-30% and then assuming it is getting taxed at Australian tax rates (a very conservative view of cash flow for some ex pats). This has also contracted how expats borrow to almost the same extend as for investors.

APRA will continue tightening until the lending market has a more sustainable investor and interest only mix. Then and only then will we start to see things settle down and see less frequent change in credit policies.

Now, more than ever, borrowers need the advice of an expert mortgage broker. Their ability to navigate what has become the most complicated lending marketplace for over a decade is very powerful for borrowers to ensure that they get the best solution for their personal situation.

Smartmove Professional Mortgage Advisors | 02 9968 5000

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