A must read for Property Investors before the next rate rise.

There is a lot of talk about investors slowing down with the rates increasing and the guidelines toughening up for borrowers with multiple properties. This has already started, and we are seeing the trends in our appointments each week.

 Not being able to buy another in their portfolio is not the only issue that will affect investors this year. The other issue that is about to come into play is the ability to extend the interest only terms on current investment loans. Clients who have opted for 5 years interest only loans 5 years ago when lending was easier, will end their terms and may find they cannot roll over the interest only again.

This issue has a few different layers. Firstly, a lot of these investors have not had to contribute to investment loans before. If you bought 5 years ago and have paid interest only for the past 5 years chances are that the property mostly paid for itself. With the past 8 rate rises this may no longer be the case and investors are already feeling the pinch. Secondly as interest only rolls off the repayments increase significantly, investors are fast approaching banks and brokers to “roll the loans over” to interest only again only to find that they no longer are able to afford the loans they have on the current calculators. As a result, they are forced to increase repayments to principal and interest because they technically can’t afford the loans, even though the principal and interest repayments are higher. The third and most painful part is that the loan term was initially 30 years and because they have already had 5 years interest only the repayments left on the term are now 25 years Principal and Interest, which is quite a lot more than if they had paid the principal the entire time.

We are having regular conversations with clients where they have had no changes in their situation, however they can no longer pass the lending criteria to make changes to their borrowing. In some cases, the lending can be moved to an alternate lender. In some cases it cannot.

There are a few lenders that have some different rules for investor lending and some that have lower “buffers” than others but overall, there will be some investors making the tough call on how to restructure their lending to facilitate the changes.

Personally, I held investment properties in 2010 when rates were like they are now, so you would think I have seen this before, but back then the banks looked at “actual repayments” for other loans. That means if you had several other investment properties the banks assessed the actual repayments for your borrowing. While rates have been low this has changed. For example, if you had a $500,000 investment loan at 5.5% the repayments are $27,500pa. That property may rent for $500 a week ($26,000pa) so not a whole lot of extra income is needed to service the debt. Now we are looking at other lending on a loan that is interest only for 5 years at the 25 year loan term that will be left at the end of interest only and at the bank’s assessment rate. Right now, this is generally over 8%. So on that same $500,000 the bank is looking for assessed repayments (your ability to pay) $48,000pa. They are also taking no more than 80% of the rent (sometimes less) so $20,800. That means you need to show close to $30,000 in net disposable income for each property (assuming this level). If you hold 3 or 4 properties as well as having a mortgage this is unachievable for most Australians.

Changes are coming for investors and most are unaware of how much this will impact them. There will be many that have to sell properties, and some will adjust their spending and weather the storm and hold their portfolio. With each rate rise borrowing becomes harder so I encourage the investors out there who wish to hold and extend interest only terms to do so sooner rather than later. You do not need to wait for your interest only term to be up before you refinance for longer interest only terms. Another option may be to extend the loan terms out to 30 years but start paying principal and interest now.

If you would like to discuss your portfolio, please reach out to our team. We have several brokers highly experienced in investment lending and can be part of your team through this next phase. A Sphere Home Loans broker costs nothing to the client. If rates do increase tomorrow, and I suspect they will, there will be a short window before the banks increase their buffers again. If you are an investor it would be wise to review your lending in this short window prior to the assessment rates increasing again.