What Do Lending Changes Property Investment
In December 2023, APRA, the prudential regulator of the Australian financial services industry, announced an increase in supervisory focus on residential investment property mortgage lending.
This announcement was directed at Authorised Deposit-taking Institutions (ADIs) - corporations authorized under the Banking Act 1959, including banks, building societies, and credit unions - and was a response to several indicators: Strong growth in investment property loans, high Australian household debt, accelerating credit growth, and historically low-interest rates.
APRA reiterated the seriousness of its intentions in May of this year, with chairman Wayne Byres saying that: "ADIs with more aggressive practices should fully expect to find APRA increasingly at their doorstep."
On the upside, APRA didn't introduce across-the-board increases in capital requirements or caps on any particular sort of loans but focused its attention on a couple of critical areas.
Higher-risk mortgage lending
Lending considered "higher risk" includes high loan-to-income loans, high loan-to-valuation loans, interest-only loans to owner-occupiers, and loans with very long terms. APRA warned ADIs that increases during this lending could trigger further supervisory action.
Investor Impact: ADIs will likely make it easier to urge a loan with an honest deposit or limited income.
Investment property loan growth
APRA set a 10 percent portfolio growth benchmark for lending by ADIs for investment property loans - ADIs exceeding this threshold may attract further scrutiny.
Investor Impact: ADIs will likely slow their investor loan portfolio growth so that they do not exceed APRA's benchmark. This could include removing discounts on investment property loans, so cheap credit could be harder to return.
Serviceability assessments
Serviceability means a borrower's ability to form their loan repayments. APRA said that ADIs should include a rate of interest buffer of a minimum of 2% and a "floor" lending rate of a minimum of 7% when assessing serviceability.
Investor Impact: If you're considering taking out an investment property loan, base your calculations on a 9% interest rate (7% "floor" plus 2% buffer) for a safe amount to borrow. Many ADIs put such cushions in situ when interest rates first reached historic lows.
Increased capital requirements
Additionally, on 20 July, APRA announced a rise in capital that various ADIs must put aside for Australian residential mortgage exposures. The change comes into effect on 1 July 2016 and impacts those ADIs accredited to use the interior ratings-based (IRB) approach to credit risk.
Investor impact: Affected ADIs may search for ways to offset the increased capital requirement, meaning discount rates could be more brutal to seek out.
Summation: Different lenders are taking different approaches to meet the APRA guidelines, increasing the complexity of investment property home equity credit approvals. If you'd like help navigating lender requirements or want to understand how these changes could affect your personal situation, contact your mortgage broker today.
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