Lending market changes in 2015 ? looking ahead, what?s next?

As I've said repeatedly on SS, 2015 is a year where policymakers are making significant interventions in the lending market (in particular to investors). To date, these have been regulator-induced changes that try to protect against 'asset bubbles' forming and the associated pain (I may post separately on this to contextualise the problem).

Regulators (APRA in particular) have made changes to change the incentive structure of the investor segment of the market to try and slow lending growth and promote more prudent lending in Australian housing. Hopefully everyone was adequately prepared/advised and made plans as necessary!

As mentioned, the latest changes were INCENTIVE driven and targeting obvious areas of concern (serviceability). Changes in pricing for investors and 'fixing' weak spots in our prudential system (clever manaevouring around 'assessment buffers' by investors/banks). These have all been regulatory changes that could be considered relatively reasonable

Now this begs the question what's next if this round of changes doesn't cool lending growth? Right now the regulators (APRA) will be playing a 'wait and see game' with lending market conditions (RBA are also doing much of the same while waiting on economic data).

Back in January I made a few calls based very much on what I'd do if I were the regulator? - promise I don't work for/advise APRA as some have suggested ;).

That said, if the investor lending data comes in above expectations, this is what I think may happen.

The next round of changes I suspect will be much more direct. APRA have already TOLD us very clearly that they CAN and WILL go down this route if necessary (in their December letter, reading between the lines a little). Now what does this mean?

1. A direct LVR cap on all investors. Likely to be set at 80% LVR.

a. Will this be geographic based? I doubt they'd be daring enough to go here - I can imagine the economists squirming at the thought of this. BUT, it's something that they are actively looking at and MAY have a growing appetite if growth in investor lending continues above 10 per cent.

2. A ban on interest only loans for PPOR, with some small exemptions for hardships.
a. Interest only loans are a NIGHTMARE for regulators. Given that it relies on prices to either stay flat or increase to maintain equity - its viewed as SPECULATION from buyers that the value of their home will increase. Regulators have very little comfort with ?speculative? acquisitions of PPOR's. As such, the 'non amortisation' of PPOR loans is a big NO NO.

3. A bigger differentiation in pricing between investors and PPOR holders (incentive effect).
a. I think the latest cuts may give the RBA room to fire another shot or two. I wouldn't be surprised if these injections solely went to PPOR holders and excluded investors completely. They'd do this by making banks continually hold more capital against investment loans and thereby pass on costs to investors.

So what to do?

Right now I wouldn't be advising people to do too much - data will need to come out. If it does come out too strong, then 'bring forward' high LVR purchases. Lock in I/O terms as far as possible.

Hope this helps!

Cheers,
Redom
 
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I already have my loans set for IO for 5 years. Is there a further "locking" I need to do or is this it?
You can 'harangue' ;) or ask nicely for I/O for 10 years, Jerrybee. I've known someone who was successful at getting an extension from 5 years to 10 years just by calling the bank. No harm trying. :)
 
You can 'harangue' ;) or ask nicely for I/O for 10 years, Jerrybee. I've known someone who was successful at getting an extension from 5 years to 10 years just by calling the bank. No harm trying. :)
Really dependent on lender - heck theres some which will allow 15 years off the bat if you can service adequately.
 
What do you guys reckon for first time investors who are trying to save up and are at the 5 - 7% (95% LVR) mark of savings for IP1 ? Just keep saving up till they are at the 20% (80% LVR) mark ? Or run like crazy now, take a personal loan and dive for IP1 because 95% is definitely going to be impossible in the coming 2 - 3 years ?

Cheers,
 
What do you guys reckon for first time investors who are trying to save up and are at the 5 - 7% (95% LVR) mark of savings for IP1 ? Just keep saving up till they are at the 20% (80% LVR) mark ? Or run like crazy now, take a personal loan and dive for IP1 because 95% is definitely going to be impossible in the coming 2 - 3 years ?

Cheers,
Based on the current regime (and the previous), aiming for a 10% deposit + costs (90% LVR) provides you with a much more cost effective finance structure, and allows you to grow a lot quicker than 95% LVR purchases. Whether or not there may be LVR caps imposed in the future below this level is up for debate, but it's certainly the reality for today.
 
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