It’s possible that interest-only loans will soon become a thing of the past. Here’s a look at what investors need to know about getting finance in 2019.
It’s no secret that 2018 was a rollercoaster of a year for the finance industry. Reforms in the industry stemming from the Banking Royal Commission findings have had a big impact on the home loan lending process, particularly for property investors.
The home loan lending environment has changed significantly and the days of quick and easy access to finance are over – at least for now. This article by the mortgage brokers at Divitis Finance covers the changes to the home loan lending process in detail.
Here are some of the key take outs for property investors in 2019:
1. Investment Loans Are More Expensive
Last year the Australian Prudential Regulation Authority (APRA) removed the 10 per cent benchmark on investor loan growth that had been in place for several years. Instead, APRA is introducing more permanent measures to strengthen lending standards. Among them is setting limits on maximum debt-to-income levels for individual borrowers. This is intended to limit lending to highly-geared investors while minimising impact on home owners and investors with minimal gearing. Depending on your situation, this may make it harder to get an investment loan and more expensive if you do get approved.
2. Interest-Only Loans Are Harder To Get
Because the banks are now required by APRA to limit interest-only lending, these loans are now much harder to qualify for, with strict lending criteria, and interest rates for them have gone up. It is quite possible that interest-only loans will soon become a thing of the past.
3. You’ll Have To Provide More Documentation
Banks are no longer taking what you say on home loan applications at face value. They’re asking more questions about your income, assets, debts and living expenses, and requiring more evidence to back it up. Because the banks now have greater obligations in terms of justifying their acceptance of your application, they will scrutinise the evidence you provide closely. They are likely to come back to you with additional questions about anything that’s unclear or which you have not disclosed upfront.
4. The Application Process Will Take Longer
Due to this greater need for due diligence, investment loan applications are taking much longer to be approved than they used to. Expect to go back and forth with the bank on aspects of your application and be prepared with as much information and documentation as possible.
5. You Won’t Be Able To Borrow As Much
The combination of tightening lending standards and higher living expenses benchmarks means many would-be borrowers are finding that they are eligible for considerably less credit. Banks also previously estimated living expenses with a buffer of 1.5 per cent to account for potential interest rate rises. New calculations increase this buffer to 2 per cent, which can also make a significant difference.
6. It Could Prove Hard To Refinance
All of the changes in bank rules around lending mean that many people’s existing loans are much higher than what they would be able to borrow in the current climate. This has left many borrowers unable to refinance existing loans, as they can no longer qualify to borrow the amount that they need.
The Silver Lining
Despite all of this, we believe 2019 will be the year of the property investor with rental yields rising and bargains to be found. Weaker market conditions also mean there is less competition for attractive investment properties. Particularly if you are investing for the long haul, this year could be the perfect time to find a quality investment.
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