In the wake of APRA’s push for lenders to reduce their investor loan books, I’ve been keeping a close eye on the lending market.
And there’s been plenty of movement as everyone from the biggest banks – CommBank, ANZ, Westpac and NAB – to the smaller online lenders like loans.com.au, eMoney and Homestar, have tightened restrictions around investor lending.
There are several tactics home loan lenders are using to reduce their investor loan portfolios to under a 10% growth per annum:
- Lifting interest rates for investment loans
- Reducing maximum loan to value requirements, meaning investors will need a larger deposit
- Increasing stress tests for investors with higher interest rate scenarios
These changes, in particular the LVR restrictions, have got me thinking about a major trap for investors purchasing off-the-plan investment properties.
Let me explain. Generally, when you put down a deposit on an off-the-plan apartment the builder will ask for 10% of the property price. Once the property is built, you can then take out a loan through one of the many lenders that offer mortgage packages to investors with an LVR up to 90%.
However, if more lenders follow the moves of banks like Westpac and ING DIRECT and reduce their maximum LVRs to 80% for investment loans, when these apartments are completed off-the-plan investors will then need a deposit of at least 20% to meet the new LVR requirements. Which could put investors who hadn’t planned to pay more than the original 10% deposit in a tight spot.
So if you’ve bought or are planning on purchasing an off the plan investment property, here are my tips for meeting the stricter LVR requirements:
1. Buy in an area that is tipped to see capital gains. A major risk of buying off-the-plan is that the market could drop by the time the apartment block is completed. So make sure you do your due diligence before purchasing an off-the-plan property, by researching the area to ensure it is likely to see growth. Australian Property Monitors is a good place to start your suburb research.
2. Consider boutique unit blocks. When choosing an off-the-plan unit to invest in, keep in mind banks prefer to lend to investors purchasing boutique blocks that require lower maintenance, compared to larger blocks of units that may run into more problems.
3. Speak to your lender. Before putting down a deposit, it’s wise to have a chat with your home loan lender about the off-the-plan unit you’re considering. Tell the lender the name of the development, as some home loan providers may not approve loans for off the plan developments through certain builders with a bad track record.
4. Get saving. If you’ve only just purchased an off the plan property, chances are it still has a few years until completion. So use this extra time up your sleeve to begin putting money aside, so by the time settlement rolls around you’ve got a decent deposit saved up. For instance, if you’ve purchased an off the plan worth $600,000 and put down a 10% deposit of $60,000, you will need to save up an extra $60,000 before the building is finished to have a deposit of 20%. Plus you’ll also need to save for the cost of stamp duty, which in NSW will be around $22,000 on a $600k property.
5. Use your equity. An alternative option for investors that already own a property is to use a portion of your equity as security for the loan, which will mean you won’t need a deposit to take out the loan. But keep in mind, you’ll still need to cover the other upfront costs like stamp duty, registration fees and the home loan application fee.
6. Ask a family member to go guarantor. Alternatively if you don’t have any assets to use as collateral for the loan, you could ask your parent/s to become a guarantor on your loan, which would mean a portion of your guarantor’s home would be used as security and you wouldn’t need to come up with the full 20% deposit. While some lenders may allow another family member (e.g a sibling) to go guarantor, they will usually require a non parental guarantor to own a percentage of the property you’re purchasing.
Want to know which providers have tightened restrictions for investment loans? Read our full rundown here.