A lot has changed in Australia’s lending landscape recently so I got together with Ben to discuss how these changes are affecting property investors.
A lot has changed in the lending landscape since last time me and Ben about the lending changes, which I think was some time last year. So, we thought that we’d do another episode today to talk about what’s happening in the market and who these lending changes are affecting and how they might affect you. So, hey guys, I’m Ryan from onproperty.com.au.
I help people find positive cash flow properties. And with me today, I’ve got Ben Everingham from Pumped on Property who’s my buyer’s agent of choice and who knows a lot more about this than me because he’s dealing with a lot of different investors who are going through this at the moment.
Ben: Thanks Ryan. As always, neither of us are mortgage brokers or licensed. So, these are just observations based on us transacting in the current marketplace and learning as we go.
Ryan: Yeah. So, this shouldn’t be considered mortgage advise, #disclaimer.
So, what has been happening in the market? Has it been getting easier? I know it hasn’t. So, it’s been getting harder. What’s been going on?
I did it again! This always goes down!
Ben: My stand up desk is killing you today.
Ryan: Maybe we need to swap sides.
Ben: So the marketplace has changed and the major changes of the last round of changes was the 31st of March 2017. So, we all know there were some major changes in 2016, which kind of affected stuff, kind of opened up different options and opportunities for people. There’s been some changes recently as well, which are having an affect on very specific people in the market, primarily certain parts of the investment market.
Ryan: Yeah, so primarily investors; which is the people who are probably listening to this. Previously, when we talked about the changes last year, in 2016, that was APRA brought in these new guidelines, etc. Is that the same thing that’s happening? They’ve just brought in heavier guidelines?
Ben: Effectively, APRA came in, slapped everyone over the wrist and then 3 months later, the market got hotter – which is often the case with these band-aid fixes. And so, they’ve just come and put more pressure on people to say, “Hey, investment lending is a little bit out of control. Let’s re-balance your books.” so no one’s overexposed.
Ryan: For people who don’t know, APRA kind of who creates guidelines for the banks and the lenders in what they should be lending to people and how they’re lending portfolio should look. So they bring out these new guidelines –
Ben: They’re like the police of the banks, in a way, and the banks don’t have to follow them. But if they don’t, the banks can get in a lot of trouble later on if something happens.
Ryan: Okay. So they brought in stricter guidelines that are affecting primarily investors. So let’s talk about those guidelines. Why that’s affecting people? And then, towards the end, we’ll talk about what you guys can do.
Ben: Cool. Some of the major changes that I’ve been observing is, firstly, by saying this is not affecting all investors. This is not affecting all banks. Certain banks have overexposed themselves to the lending market according to APRA’s new regulatory guidelines. Which means those banks have to be soft for a little while until they re-balance their books. And then, wait for them to come through the second half of this year, open up for business again. Which I can almost guarantee is going to happen.
Ryan: Yeah. The thing is, banks still want to make money. And just because APRA brought new guidelines doesn’t mean the banks are happy to make less money. So, often, when we see these guidelines happen, it’s almost like a balancing act on the pendulum. Something goes down, but something else, like some other opportunity comes up.
Ben: 100%. Some of the big things that are affecting investors and the major investors that are affected are self-managed superfund investors. The other investors are people with 3+ properties just with normal average income jobs. So, people with large amounts of loans. Some of the things that are being affecting at the moment is the way banks are calculating certain things. Right now, some banks are asking for larger deposits.
Some banks are looking for principal and interest rate payments on their loans, instead of interest only. Which has been pretty common since the global financial crisis in Australia.
Ryan: Yeah. Especially for people investing in positive cash flow, they love interest-only because it just frees up, you’re not having to make the principal payments. So, it makes your loan repayments less, which frees up their cash to do what you want with. So, you’re saying it’s getting harder for people to get interest-only loans?
Ben: Yeah. Especially those top tier, like the 4 majors and the secondary tier underneath that. Again, it’s a case-by-case basis. Like, this week, I saw Commonwealth Bank give a sophisticated client of ours an interest-only loan with a 10% deposit. Last week, I saw them disapprove the same type of client and had a 20% deposit and asked them to go principal-and-interest. So, the thing is, right now, it’s not consistent.
It’s about the position of the bank at the time that you asked for the loan, which is very frustrating. But, part of the new world that we’re in right now.
Ryan: Something that’s going to be important for you guys is that it takes time for mortgage brokers to deal with these changes. And they are often so used to going through certain banks that when these happens, they can’t go through the same banks. They don’t necessarily know what the solution is for the client. But, often, if you can find the right mortgage broker, there is some sort of solution out there.
Ben: Yeah. Like, your average mortgage broker is supposed to have 30 relationships, but the reality is, they probably use the same 2 banks for 90% of their work because it’s easy, they know someone there. So, it’s just about these brokers getting their heads around these second and third tier lenders, which they haven’t really had to use in the past and making sure that that’s right from their perspective. Pretty soon, they’ll understand how to deal in this environment, the same way they always do. But, it might just take a couple of months for them to wrap their head around it.
Ryan: Okay. So, principal-and-interest loans are becoming loans are becoming more common. Interest-only potentially becoming harder with certain lenders. What else?
Ben: Servicing-wise they’re looking at every property that you own right now. Like, the interest rate for that property is 7.5% or 7%, minimum, and a principal-and-interest repayment. So even if you’ve got a 3.5% loan –
Ryan: Let’s just clarify there. You’re not saying people are actually having to pay 7.5% interest rate?
Ben: Sorry. God, no. Sorry about that. To confirm, I’ve got loans at the moment that are 3.5% interest rates and 4.5% interest rates. But, when I go to borrow more money later this year to buy another property for myself, the banks are going to look at those loans like I’m paying 7.5% or 7% right now, principal-and-interest repayments.
The only reason they’re doing this is because, obviously, on paper, it looks like it’s a lot harder for me to borrow money. Which means less people can get money right now unless people can actually keep speculating and feeling this growth in Sydney and Melbourne that’s been occurring for the last 3 years.
Ryan: So you might think that, “Okay, I’ve got a loan. Let’s say, a 4.5%. Here’s how much I’m paying. It’s only interest-only, so I’m only paying X-amount a month.” And then you go to a lender and you’re like, “Well, I can easily afford another one because I’m only paying interest-only at 4.5%.” And they say, “No, you can’t afford another one because we’re pretending that you’re actually paying 7.5% and you’re paying an interest-only loan.
And so, we’re assuming that you’re paying that or you may have to pay that in the future. And so, we’re using that for our calculation to say, ‘Okay, let’s assume that you’re paying that or will have to pay that in the future. How much can you borrow once we take that into account.'”
Ben: So you can imaging the types of people that this is affecting. Like, those in self-managed superfund is a whole different ball game to talk about. People with 2, 3, 4 properties that are earning an average household income in Australia can be significantly affected by these servicing limits. Where people with no property, just getting into the market aren’t affected at all. Or, people with 1 home, with a little bit of equity in it aren’t really affected either.
It’s deliberately slowing down a percentage of the market, which are investors like me that are enjoying the current conditions, I suppose, you could say.
Ryan: Yeah, that you want to go again. You’ve got 4 or you’ve got 5 and you want to continue to expand your portfolio. It’s really frustrating as well when – I know they also do this on how much they expect rental income as well, don’t they?
Ben: Yeah. It’s always been the case that the banks will only take into account 80% of the weekly rental income. So, yeah, they’re continuing to do that now.
Ryan: Are they still doing that? I know sometimes they’ll say, “Oh, we’ll only take a rental yield of X-percent.” Even if you’re getting a better rental yield.
Ben: Yeah. They’ve always capped the – or in the last few years since APRA started to make these changes, they’ve also capped the yield. Which means, they best rental return you could be getting is 6%. Now, this hurts because I’ve got properties, for example – and I know people that have properties with 10%, 15%, 16% returns based on the total debt-to-value or income from the rent at the moment. So that can really impact your servicing.
It’s not definitely not the good old days. You know, the Steve McKnight days where you kind of could borrow money if the property was $1 a week positively geared and infinitely into the future, buy as many properties as you want and hope that the world doesn’t fall on your head while you’re doing it.
Ryan: Okay, so I guess we got those. But that’s not really – I guess that’s kind of stayed the same. It’s not really a big change, but just the increasing how much the assumed that you’re paying is just really hurting people.
Ben: Another major change that they’ve brought on at the moment, which is the first time I’ve really seen it, is they’re really de-valuing down existing properties with their valuations. Obviously, if you’ve got a property that’s worth $600,000 that you owe $300,000 on.
In the past, you could have borrowed up to 80% of that $600,000 and that was your equity. But, I found a lot of valuers at the moment to tow the line with these APRA changes and basically stepping in and going, “This $600,000 property is what any day of the week a good agent could sell it for. But, I’m telling you now it’s worth $520,000.”
So, again, it’s stopping people’s ability to re-draw money and speculate and move into the market again. Kind of smart stuff when you think about it. Like, it’s going to have an affect to settle the market down in those capital cities. But, tough if you’re someone that’s trying to work towards financial independence and you’re half way there, if you know what I mean.
Ryan: But then, assuming that the majority of the market is homeowners who might just own their own home or own one property. Then, it’s probably not going to hugely affect them, is it?
Ben: Well, 80-90% of these people on this video, I don’t think it will have any effect on. It’s more those people that are at properties 3-5 or 10 that are really being hurt right now. They probably had a pretty good run if they’ve got that many properties in the current cycle anyways.
Ryan: I feel like last time, we talked about it and the APRA changes. They basically stayed the same for homeowners. I’m not sure if it actually got better or if it just felt like it got better for people wanting to buy their own home just because it got worse for investors.
Ben: I think it could be that. It really hasn’t affected 80% of the market. It’s just affected that very specific niche.
Ryan: Is there anything else that we needed to cover about these changes? I’m just looking at our board, we don’t have any more notes.
Ben: No, I think that’s it. We’ve talked about who’s going to be affected and we’ve talked about the power of having a good broker. The number one thing I’ve learned at the moment is just because one broker says, “No.” because the bank that he’s used to doing business with, for example Commonwealth Bank or something, is asking today for 80% or 20% deposit, doesn’t necessarily mean that the same broker tomorrow won’t have another acceptable outcome with another top tier lender.
So, don’t take their advise right now as absolute gospel. Talk to a couple of banks. Talk to a couple of different brokers. If enough of them say, “No.” Obviously, take their advise on board because they’ve got a good way of analyzing risk. But, there should be an option for most people in the current market if you’ve got the right team around you.
Ryan: Yeah. And one of the best things to do as well. Yes, see multiple brokers, but also ask, “What can I do to get a loan? What do I need to change to get a loan?” Because part of that is like finding out yourself what financial stuff do you need to change in your life. Maybe it’s something simple like less credit card debt or less credit card limits or maybe you need more income. It might be like that. But then, it also might flick the switch in the mortgage broker mind to say, “Okay, what do I really need to do?” Or, maybe you don’t need to do anything, you just need to find another solution.
It used to be that just go to one broker and they should cover you. But now, it’s kind of like if you’re having trouble, definitely see multiple brokers. Because someone might know something that another broker doesn’t know. Or, they might have a relationship that another broker doesn’t have.
Ben: 100%. There’s good brokers and there’s bad brokers. There’s people that know the market and respond to changes, that are always learning. And there’s other people that have been doing it for a little while or have never had a market like this before because they’ve only been in it for a couple of years. They’re probably not the right partners at this time. You’re looking for someone that’s been through this type of conditions before.
The world of finance is very simple. Money gets very easy, prices go up. Money gets tighter, prices stay the same or go backwards. It is literally that simple and we don’t want to over complicate that.
Ryan: Is there anything else that people can do if they are in this situation where they’re having trouble? What are you guys trying to do with your clients? Or, what are some things that people can do to keep moving forward, keep pushing towards financial freedom even if they’re having trouble?
Ben: Look, I’ve actually only seen one person that I’ve spoke to in the last 4 months that hasn’t been able to get financed once introduced to the right person. You know, if you’re sitting there and freaking out about this stuff and you can’t move forward, maybe it’s worthwhile getting a second opinion.
Outside of getting a second opinion, it’s a great opportunity to just take stock of your current portfolio, maybe review those properties. See if there’s anything sitting there that doesn’t have long term potential and potentially consider letting go of an asset at a high price or going back into that portfolio at the moment and finding ways to increase the rental return. Increase the value of the portfolio by doing smart little things so that your position from the banks’ perspective looks better.
But, as always, people with loan-to-value ratios across the board of below 80% still don’t have significant issues no matter how many properties they own to borrow money. It’s more those people that have go the 5% and 10% deposits in recent years and the properties haven’t moved that are finding it hardest to move forward.
Ryan: Actually, one thing that we forgot to mention was that banks are now requiring larger deposits.
Ben: Oh, yeah. I forgot about that. It’s kind of a big one.
Ryan: It’s kind of a big deal. You need more money to buy a house now. Okay, that’s kind of misleading. It’s not that bad.
Ben: It’s not that bad at all. Some banks are asking for – where one of the big 4 might have asked for 5% or 10% deposit 4 months ago. Some of those banks on certain days of the week might be asking for 10% deposits. On other days of the week, they might ask for 20%. Or, they might not want to work with you if you’re not an existing client or customer of theirs. So,
So, there’s just things to consider. But, the Australian market has so many great lenders, it’s maybe not about working with the big 4 right now, who have over stacked their books with investors and looking at other alternatives.
Ryan: So, are there still 5% loans out there or has that gone the way of the 0% deposit?
Ben: I think it’s very difficult to get a 95% loan at the moment if you’re one of the people we talked about before. But, I have seen 105% loans in the last 3 weeks with people that have used brokers from Sydney and Melbourne that have good equity and a property and just releasing that equity and not having to put their own money down.
So, it really depends on your total position. I suppose, more than ever, these APRA changes are looking at total positions as opposed to one property and a silo here, one job and a silo here, one credit card over there. They’re looking at the whole thing and going, “What’s our exposure? What’s our risk? What are the guidelines? How does this person fit with what we’re supposed to write right now?”
Ryan: Yeah. That’s why we say it’s so important to go and see a mortgage broker because, as you can see, everyday of the week seems to be different. Tuesday could be different to Wednesday. Definitely speak to a mortgage broker or maybe multiple mortgage brokers to find out about your specific situation and how these changes affect you moving forward. Even if you’re looking to buy in the next 3 months or 6 months or something like that, you can always just go and ask and find out.
You can even do analysis of different situations with your broker and say, “What would happen? If I did release this asset, sell this property and got this much, would I then be able to borrow or not?” They should be able to help you understand whether or not that will affect your situation.
Ben: The number one question I’ve always asked, which Ryan mentioned before, is if I can’t do something now, how do I put myself into a position where I would look more attractive to the banks? Or, what alternative options do I have in the market? And then, that gets the broker thinking differently. It gets you thinking differently about solutions. As opposed to getting caught up in stuff that isn’t even real for you.
Ryan: One of the big things that I really want to get across to people is to focus on what you can do and not what you can’t do. There’s obviously these changes in the market, which we can’t control. But, what you can do is you can speak to multiple mortgage brokers to do your best. Even if you can’t borrow, maybe there’s things you can do on your existing properties to actually move them forward, to increase their value through renovations or to increase their cash flow through granny flats. There’s multiple different ways that you can go to still be making money in the market even in this tough time.
Ben: This is an interesting point because I look at my personal portfolio and right now, I’m renovating and selling a property. Yesterday, I was actually thinking of selling another property to release some valuable equity and cash to pursue other options in market now that I know more. There’s great opportunities around if you know where to find them right now.
It’s one of those things where property doesn’t have to be this thing that you buy and hold for 30 years. It’s okay if you’ve got an underperforming asset to take that money and re-invest it in a better opportunity – which is something that I’ve just become comfortable with. But, now I realize it’s a part of the necessity of life.
Ryan: It’s so hard to let it go, right?
Ben: I was so attached to that little property because it was my first or second or third. But now, the opportunity has come.
Ryan: It was so hard to get at the time. You had to strive.
Ben: Spend 6 months of weekends looking for it and then I found it. And now, I’m emotionally attached to it. But, I can go a find a better deal any day of the week now. I know better and that’s why I’m offloading stuff at the moment to go buy better.
Ryan: This is not meant to be doom and gloom in any way. There are some changes that has happened. Hopefully, we’ve given you guys a good overview of that. And hopefully, now you can understand these changes a little bit better and it’ll help you move forward towards your goal of financial freedom or whatever your goal may be.
Alright, so that kind of covers everything, guys. If you want to check me out and if you want help finding positive cash flow properties, go over to onproperty.com.au. Or, you can check Ben and his buyer’s agency out at pumpedonproperty.com.
Thanks so much for coming on today and sharing this information.
Ben: No probs. Thank you very much for having me.
Ryan: We wish you the best, guys. And until next time, stay positive.