Investors should be under no illusions. Following the establishment of the Banking Royal Commission and the tightening of APRA’s lending regulations, it has been and will continue to be difficult to fund investment borrowings. Adding to the problems for borrowers is the squeeze on lenders’ profit margins due to an increase in the cost of short-term overseas borrowings.
Combined with the impact of falling property prices in many locations, off-the-plan purchasers are being squeezed when their purchases come up for settlement. This can be up to several years after the signing of the contract and funding approved at that time comes up for review.
This review process can be very painful when property values are assessed at significantly less than the contracted purchase price. Even when purchasers can satisfy the new tighter lending standards, it’s now much more difficult to obtain loans with high loan valuation ratios. Gone, most likely forever, are the opportunities to borrow on an interest only basis 100 per cent of asset valuations.
The failure of even some purchasers to complete their settlements adds to the downward pressure on valuations. This situation has arisen even while mortgage interest rates remain at historically low levels. Rates appear likely to rise modestly to accommodate the increased borrowing costs of lenders. But overall, they will remain at low levels because the Reserve Bank is reluctant to increase the official cash rate.
Obviously, potential buyers can postpone their purchases if they are unable to obtain the required funding and there’s already criticism that the latest credit squeeze is hurting potential first homebuyers. The situation for investors is better because of the negative gearing tax deduction but gaining access to investment loans is still the crucial issue.
Investors now face much tighter scrutiny of their expenditure commitments and their ability to service the loan if interest rates rise or the property isn’t occupied for a period. Obtaining a loan even for those with substantial equity in their owner- occupied house is now a much more painful and time-consuming process. The review process favours better off customers, particularly those without family or other commitments.
As hard as its impact on some potential purchasers may be, tighter lending standards help ensure borrowers do not end up being forced to sell their properties because of their inability to service the mortgage. APRA’s regulation tightening is designed to protect the integrity of the banking system and any collateral damage to the property market is an essential part of doing this.
The warning for potential borrowers is clear. Off-the-plan transactions are a risky way for buyers to acquire properties and are now even more risky because of the tightening of credit regulations.
Daryl Dixon is the executive chairman of Dixon Advisory