Last year there was a major shake up in the Investment Loan market brought about by recommendations by APRA (Australian Prudential Regulation Authority) to the banks that they should be holding more capital reserves.
All of a sudden if you had 5% or 10% to put down and start building your investment portfolio you were told to wait a little longer until you had a 20% deposit saved.
APRA made these recommendations for good reason I’m sure and I’m on board if it’s going to strengthen our industry and the country’s economy overall. It was just a major ‘buzz killer’ for anyone excited about investing in property and who were already pre-approved with one of the major banks.
If these people had a good Mortgage Broker looking after them then they would have continued on with their plans but with a different lender.
I have one example of a client of mine who was just about to buy investment property number 2. He was with a particular lender and they announced that investment loans now needed a LVR of 70%. This left him high and dry as far as his investing plans go because now he couldn’t access enough equity to purchase the next property without paying mortgage insurance. That percentage difference between a 70% and 80% LVR really put the kibosh on his plans.
Luckily I was able to provide him with alternative options and refinanced him away from that particular lender. He then had the cash available to purchase that next property and was able to proceed with his original plans.
INVESTMENT LOANS – CHANGE IS A CONSTANT
Change is definitely a constant in the investment loans market and it’s keeping this Mortgage Broker on his toes. Rates for Investment Loans are now higher than those for owner occupier loans.
Choosing the Interest Only option is no longer just a box to tick. You have to pay a higher rate now and servicing is assessed at a loan term shorter than the 30 years you probably nominated. If you choose a 3 year Interest Only period than servicing is based on a 27 year loan term. This means your repayments are assessed at this higher mark, meaning you have to have higher income to pass servicing.
APRA have also set targets for lenders regarding Interest Only loans as well so I’m finding that a particular lender this week will be fine with offering Interest Only loans but next week they won’t be but some other lender will be. This is a result of each lender trying to manage their Interest Only ratio of loans on their books.
CHOOSING A HOME LOAN FOR YOUR INVESTMENT PROPERTY
There will be different lenders offering different deals for investors and policy will vary so it will pay to consult your Mortgage Broker if you are looking at purchasing an investment property. My advice would be to pick the lender that offers the best value and suits your specific needs then get pre-approved quickly. If you hold off for too long the market will change and you’ll have to reassess your options.
The state of play right now with home loans for investment property is that the majority of lenders still require a 20% deposit from you but there are still some who’ll accept a 10% deposit, and for the time being and at least one is allowing a 5% deposit inclusive of mortgage insurance. (LMI)
If you’re setting up a loan account for an investment property you want to set things up right at the start and then leave it alone. Having a good Mortgage Broker assist you with this is key. Remember the Long Term View is what you should be taking when you’re purchasing an investment property.
Good article.
20% is always a ideal deposit as it it removes the Lenders Mortgage Insurance but this is not a easy task to get this level of savings.
Do you think it’s best for investors to come into the market as soon as possible, even if they only have 5-15% deposit? Or do you think it’s better to wait for a correction – and save a little bit more?
Hi Dennis,
Thanks for your comments, and yes a 20% deposit is ideal definitely. People avoid paying Mortgage Insurance and just have to borrow less money which are both positive outcomes. People have to be very disciplined and have to make sacrifices to their social lives to save a 20% deposit in Sydney due to high rents and the generally high cost of living here so they could be saving for a long time and meanwhile property values are increasing.
The best time to buy in Sydney is always yesterday because property values have only ever gone up over time. I think the correction you mention is already happening here right now though so I’d say today is the best time to buy. My Real Estate Agent contacts tell me that you can buy now and save 50k to up to 200k in the top end compared to 6 months ago. I’d need a crystal ball however to predict how long this will last and how much property values might decrease.
I think that if you have a long term view and you are purchasing the right property then the cost of mortgage insurance will be covered by capital growth and you’ll still get a positive return or you’ll eventually have a passive income stream if you hold the property to retirement. In short I’d say go for it with a 10% deposit but do your research if you’re investing!
Thanks for the wonderful guide
You’re very welcome Lynette, if you’d like any more information on this or another home loan topic just let me know! mitch@realityhomeloans.com.au
Mitch
That’s great Carmel. What strategy do you use when it comes to investing in property? I’d love for you to share some tips with our other readers if you have time…