Take the money and RUN!!!

Discussion in 'Property Finance' started by Redom, 11th Jan, 2015.

  1. Redom

    Redom Mortgage Broker

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    The lending environment is tightening in 2015 following APRA's latest actions in late 2014 (a cautionary word to the banks).

    In the year ahead, I expect a 'gradual tightening' in lending policy to occur. Credit growth is set to continue in 2015 and potentially accelerate past the 10% investor benchmark that APRA have set. Having worked at the one of the key regulators on macro-prudential policy, they have started game-planning a 'tightening' strategy that can be implemented over time. A few observations on how this may play out:

    • Cash outs at LMI will become increasingly difficult.
    • High LVR interest only repayments for PPOR's. I think this will become trickier. I suspect it will be treated harsher as part of credit scoring models too.
    • Extending interest only periods. APRA don't like this at all. This may mean refi's out to external banks to get around it, but the non-amortisation of loans is a big fat NO for prudent lending standards.
    • Potential tightening to serviceability calculators.
    Who this effects? The SS community is full of very experienced investors with large portfolios. But where it'll do most damage are the 'aggressive' investors in the property accumulation phase. Some examples of where I'd advise some tweaks to finance strategy are:

    1. Buy/Reno/Hold, rinse and repeat, investing strategy: This is a common and powerful equity creation model. For those with equity, a powerful way to do this is borrow at 80%, do the reno, then valuer shop and refinance and cash out to a higher LVR.
    • With cash outs being targeted, this could impose finance risk and the benefits need to be considered against possible changes in cash out policy in the future.
    2. Paying down non-deductible debt to cash out deductible investment debt: Also a great tax/finance strategy which involves paying down and cashing out from a PPOR, likely to be at I/O terms.
    • Depending on the investing strategy, I'd say proceed with caution. There's a finance risk that you might not be able to cash out after paying your PPOR down.
    3. PPOR purchases: If you're purchasing at a high LVR, you may have to pay P&I repayments with lots of lenders soon.

    4. Investment loans, pricing: Lots of lenders already charge interest rate premiums for higher LVR loans. I think this may happen with more lenders and to a greater extent as banks could be forced to hold higher capital amounts against this type of debt.

    5. Investment loans, serviceability: One of the biggest threats to borrowing power is changes to serviceability calculations. I won't be surprised if a higher assessment rate is used for investors with multiple IPs soon.

    • The biggest red flag for property investors with multiple IPs would be a mandatory assessment buffer used for other financial institution debt. I've heard whispers of this from regulators and lenders already. If this happens, it will really shake up the 'ordering of lenders' model used to maximise borrowing power.
    This isn't supposed to be a 'doom and gloom' post, just a realistic assessment of what's happening based on my time as a policymaker and as a broker. There'll be workarounds for some of these, but will likely involve some sort of cost (different lender, higher price, etc).

    I think it's important for investors to be 'ahead of the curve' and start shifting their portfolio behaviour to match future changes in the lending environment. Some would disagree with me here, but it's better to be on the front foot and prepare for it than be 'stuck' trying to respond.

    Overall, I'd say to those in the aggressive investor category, take the money when it's available to you and run! For other investors, it might be worth making some slightly more conservative assumptions in your finance plans.

    Apologies for the long post, hopefully this is of some use.

    Cheers,
    Redom
     
  2. Xenia IM

    Xenia IM Property Manager

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    Thanks - what is apra?
     
  3. Jamie M

    Jamie M Mortgage Broker - Oz Wide

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  4. barfly

    barfly My head hurts!

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  5. el caballo

    el caballo Member

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  6. lowiq

    lowiq Member

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    Thank you. Food for thoughts.

    I am currently in the process of refinancing all my loans with a single lender to the value of 8.2 million at 70% leverage. It's made up of all stand alone loans and not cross. My hesitation is that if I default in one, the lender is able to go after all of them. If borrowings may get more difficult in the future, I might do as you suggest... " take and run with it"
    This should at least see me through part of my accumulation phase.
     
  7. danwatto

    danwatto and TT

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    Nice post.

    It will be interesting to see how this plays out.

    I think alot of things can be worked around, but the biggest worry is an increase to the repayment buffer for loans with other banks. That could push serviceability down the drain. But it could be offset if interest rates go down again.
     
  8. Jamie M

    Jamie M Mortgage Broker - Oz Wide

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    That's why it's a good reason to diversify.

    $8m with the one lender is a lot of exposure.

    Cheers

    Jamie
     
  9. pinkboy

    pinkboy SS Lookerafterer

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    When you say 'all', I hope you are referring 2 or 3 large Commercial loans? :eek:

    pinkboy
     
  10. Redom

    Redom Mortgage Broker

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    Definitely Dan. I think the serviceability tightening may be a while away - its a bit 'hands on' and may be a 'tightening' measure used further down the track.

    A lot of Asian countries have utilised that exact policy mix - lending tightening with interest rate cuts. The idea is to promote the wider economy while keep a lid on excessive growth in credit. Also politically quite popular too, as most that are affected are in the top 1-5%, while it benefits the majority of the population.

    Cheers,
    Redom
     
  11. Jamie M

    Jamie M Mortgage Broker - Oz Wide

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    That's right - there always will be.

    The industry is constantly evolving and new challenges arise all the time. It's all about adapting to them.

    Post GFC there was a tightening of lending - then not long after they introduced the NCCP and credit licensing which came with a whole new set of issues, most of which stemmed from how the act should be interpreted.

    This is yet again another change that I'll keep a close eye on and adapt to.

    Cheers

    Jamie
     
  12. Redom

    Redom Mortgage Broker

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    Definitely - the competitive landscape of the lending environment is vastly different today than post GFC conditions. Furthermore, with future shifts in the financial system, there'll likely be a deeper pool of lenders rather competing with the stronghold the big 4 have on the market.

    The competition and deep market will provide opportunities to find alternative measures, but may incur some adjustment costs. Planning ahead and being on the front foot are the best tools to minimise these costs.

    Cheers,
    Redom
     
  13. lowiq

    lowiq Member

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    It would have been nice. Unfortunately, its made up of 12 stand alone resi loans. They have released approx 2 mil in equity and happy for me to borrow another 5-6 mil on top of the 8.2 mil.

    I think I will just stick to my current 2 lenders to avoid this exposure.
     
  14. NPB

    NPB Member

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    Interesting Post Redom.

    Many of the lenders have growth targets well in access of 10% so it will be fascinating to see how that plays out against regulators seemingly intent on
    restricting that growth. A couple of the big lenders (CBA and NAB) that I have spoken to are trying to tweak their policies to open up markets that they are currently missing in order to accelerate growth. NAB were talking a 25% increase year on year and CBA aiming to go from $23b in approvals to $33b which is a massive increase.

    I don't really understand the need for the regulators to intervene, the market cycle tends to look after these things in time anyway. As we know there are multiple property cycles underway in Australia at any one time, implementing policies that impact all markets at the same time seems very inappropriate and Sydney-centric policy making. Does Perth that is running out of steam after a nice growth spurt or more dramatically mining towns really need extra lending restrictions? Sydney and Melbourne will also run out of steam naturally in time so why the need to be seen to be doing something?

    Interesting times ahead.

    Regards

    NPB
     
  15. Neils Bohr

    Neils Bohr Banned

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    Thanks Redom. Interesting and useful post.
     
  16. Rolf Latham

    Rolf Latham Member

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    cough..............

    if i didnt know better id say that was a troll like response to my posts about concentration risk but than I realise I dont have that level of influence, so if I say dont be silly, feel free to ignore...............

    at least 2 lenders as u have subsequently suggested would help surviveability, 3 would be better

    ta
    rolf
     
  17. Redom

    Redom Mortgage Broker

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    Great points and part of the consideration.

    Geographic based lending policy is part of the behind the scenes discussions. Although it's very 'hands on'.

    In terms of overall policy - its a financial stability argument. Regulators fear that the market may be overextending themselves and the costs to society are bourne by all, not just the risk-takers.

    Cheers,
    Redom
     
  18. Redom

    Redom Mortgage Broker

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    I think this may be overall loan book, including commercial, business lending etc.

    NAB, the 'business bank' are definitely looking to grow as non mining business investment starts picking up again.
     
  19. rizzle

    rizzle Member

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    As someone just starting their accumulation phase...damn :/ I was going to put off switching my PPOR to I/O for around 6 months (after reno's complete and some time for the market to move). Does this mean I should get it out of the way now?
     
  20. Corey Batt

    Corey Batt Finance Broker

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    There hasn't been a single lender which has moved down this path at this time - it's more academic than anything.

    In saying that, there's no time like the present. :)