Changes to Investor Lending - Tightening

So there have been a lot of changes in the investment landscape, especially in the finance industry. Over the past few months, banks have made a lot of changes to curb the amount of money they lend to investors. Obviously, they were getting a little bit concerned with what property prices were doing in Melbourne and Sydney, and so they wanted to cool that market down. They've certainly done that. How have they done it? There's five ways. First thing is they've actually reduced the amount of rental income they can include when they look at servicing your loans. So if you have a rental income of, say, $26,000 per year, the banks are only going to take $13,000 per year of that income to go towards your servicing of new debt. So that really limits the amount you can borrow. The second thing they've done is they've jacked up their serviceability rate. So normally, if you'd be getting a 5% home loan, they'd assess that debt at 5%, whereas they're now assessing that debt at 7%. That is, they are going to forecast some rate rises and they want to factor that in. So it means you can borrow a lot less if rates are at 7% compared to 5%. The next thing they've done is limited the loan to value ratio. So if you want to buy a $500,000 investment property, you could have borrowed 95% of that previously. Now there is no one lending to investors above 90%, so you have to have a 10% deposit plus stamp duty. Once again, it just limits the amount you can borrow and therefore cools off that investment lending. There's also the fact that there are now higher rates for investment loans than home loans. So before, home loans and investment loans used to have the same rates. Now they've jacked up the rates for investor loans. It's usually 0.2 to 0.4% more than a home loan. That's especially if you're on interest only, which most investors are. And the final one is they've got a $1.5 million lending snub. What that really means is if your total borrowings are over $1.5 million, they're giving it the no deal. They don't have that much exposure to just one client there. So you're going to have to shop around and look at different lenders to for additional property purchases. So just keep that in mind. There's an unwritten law. The banks will very, very rarely lend any one person more than $1.5 million across a portfolio just to mitigate their risk. And as a result, that forces you to look at other options and other lenders there. So they're the changes to the investment lending landscape. It definitely has cooled the housing market down, especially in Sydney and Melbourne. But we're hoping that you're not going to be affected too much with this sort of information. You can now make sure that you can make those informed decisions.