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New loan standards could reduce investors’ demand for property

July 21, 2015 | By

Property investors may have to prove they have tens of thousands of dollars in reserve for every year of their loans under tighter lending standards. Advisers say tougher rules on bank capital, if passed on to borrowers, and higher deposit requirements for property investors will leave little room for people who want to dabble in the property market and don’t have a significant cash buffer.
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Those with multiple properties and low debt should be OK, according to Chan and Naylor managing director Ken Raiss. The Australian Prudential Regulation Authority this week instructed the main four banks and Macquarie Group to hold billions of dollars in extra capital to cover mortgage loans. The change may be passed on to customers in higher borrowing costs.
Prospective investors are advised to get pre-approvals first, save a large deposit and wait for prices to fall.
Prospective investors are advised to get pre-approvals first, save a large deposit and wait for prices to fall.

Investors are already required to set aside more capital to secure their loans.

The changes have significant ramifications for some investors, who could be priced out of the market, modelling by Dixon Advisory has shown.

An investor who wants to buy a $1 million property could have to prove they will generate an additional $22,500 in cash a year under new standards, assuming a 20 per cent minimum deposit. An investor with a $500,000 property could need up to $12,300 in additional cash a year.

The calculations assume principal and interest repayment at 7 per cent, rental income of 4 per cent (before the bank reduction of 20 per cent is applied) and a marginal tax rate of 49 per cent.
Larger deposits or cheaper properties

“For borrowers who are in a strong financial position, [and have a] particularly strong surplus cash flow and low debt levels, they may be able to acquire the property of their choice,” said Nerida Cole, the managing director of Dixon Advisory’s financial advice division.

Others will need a larger deposit to reduce their loan-to-value ratio or buy cheaper properties, she said.

The changes could make it “much harder to get a loan” for investors with less money, including some self-managed super fund investors, because banks don’t make much for the time it takes to prepare their loans, said Liam Shorte, a planner at Verante Financial Planning.

He advised prospective investors to get pre-approvals first, save a large deposit and wait for prices to fall. “We’d rather they have full approval before they make any deals on property because some of the banks make it very difficult to get lending,” he said.

“There’s a big fear of missing out on this property cycle, [but] you need to be sure that you’re getting good value on a property. Six months down the line it could be a buyer’s market.”

Mr Raiss said: “With the banks now looking at reducing LVRs, and APRA changing of the risk weightings, I think it will give the banks an opportunity to pick and choose between clients. Less than one in 100 properties would be investment grade. That’s why you see so many people ending up with negative gearing for such a long time.”

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