Home lending trends for 2020

OPINION

NAVIGATING INVESTMENT PROPERTY RISKS

Nervous about investment property? Then take a leaf out of APRA’s book, says market analyst and business strategist Luke J. Graham. He explains how to take advantage of APRA’s loan serviceability calculator to determine exposure to future credit changes

OVER the course of 2015, property investors were finding it increasingly difficult to obtain finance as a result of constraints applied by APRA, notably a loan serviceability calculation against an annual interest rate of 7% or more.

At the time, Sydney was experiencing its most recent of many price booms. According to ABS figures, December 2014 reported an almost record-breaking number of house sales in Sydney this side of the new millennium. The median house price had also increased by 9.5% over the preceding 12 months.

Sydney’s property market eventually peaked in 2017 when its median house price exceeded $1m. In large part, the city’s property price boom can be attributed to high levels of built-up demand combined with a series of RBA cash rate decreases.

Availability of credit In late 2011, the cash rate target was 4.75%. Within two years it had plummeted to 2.5%. Passing on these rate cuts enables the annual interest bill on a $600,000 interest-only mortgage to fall by more than $13,000 each year. Alternatively, it leads to the same interest bill for an $870,000 interest-only mortgage.

Between 2012 and 2015, Sydney homebuyers appeared to have manifested the latter, with the mid-year median house price rising from $600,000 to $860,000 over that three-year period. A correlation begins to emerge between Sydney property performance and the availability of credit.

Sydney’s sensitivity to the availability of credit is also evidenced by the triple threat of 2019: a series of cash rate decreases, combined with a favourable federal election result and the loosening of APRA’s serviceability guidelines, precipitated a resurgence of the Sydney property market.

Auction clearance rates began looking more favourable, and month-on-month

Luke J. Graham is founder and market analyst at Property Analysis Australia and is currently completing postgraduate studies at Oxford University price growth records were being smashed towards the end of the year. Elsewhere in Australia, the story isn’t quite the same. This suggests that Sydney is more responsive to these changes than other markets. But why?

The prevailing sentiment over many years implies that Sydney is not only among the most unaffordable places to live in Australia but also in the world. The city’s sensitivity to changes in the availability of credit indicates that many changes to credit. The same applies to many other cities and regional centres throughout the country.

Evidence of Sydney’s unique sensitivity to credit changes can be demonstrated by the Harbour City’s recent price correction. While Sydney’s median house price was stalling and even plummeting, Hobart, Adelaide and Brisbane were all still reporting varying levels of house price growth or stagnation despite news headlines announcing a nationwide crash.

Even though the investor may be paying a mortgage at 4.5% per annum, they could calculate whether they could afford to pay it at 7.5% per annum

Sydneysiders are teetering on the edge of externally imposed limits of affordability. The positive for Sydney homeowners and property investors is that 2019’s bounce-back may have direct positive consequences for their sale prices. The negative is an awareness that any future lending restrictions could be proportionately damning.

Uncertain future Such significant levels of sensitivity to market forces may cause homeowners and property investors to be apprehensive about the future of their assets, but respect for these market forces can also be an effective tool for long-term risk mitigation. Median household incomes in Brisbane and Sydney were comparable, with a disparity of just 12% reported during the 2016 census. One year later, during the peak of Sydney’s boom, Brisbane’s median house price was less than half of Sydney’s. With equal access to finance, this grants Brisbane a much stronger level of housing affordability and therefore greater immunity to future

My solution This analysis implies that a property investor could adopt the principle of APRA’s loan serviceability calculator to determine how exposed their own asset is to future credit changes. For instance, even though the investor may be paying a mortgage at 4.5% per annum, they could calculate whether they could afford to pay it at 7.5% per annum.

By extension, they could also calculate the level of mortgage stress a hypothetical future buyer would experience at certain purchase prices. This varies not just between cities but also between suburbs, property types and price points. It doesn’t guarantee future growth, but it certainly helps mitigate risk.

While there are many other factors that influence property performance over the long term, property price growth nevertheless boils down to the amount a buyer is both willing and capable of paying. This simple loan serviceability calculation could help prevent a whole lot of heartache in a higher interest rate environment in the future. AB

Had a particularly di cult or interesting deal? Why not share it with us? Email: victoria.ticha@keymedia.com

BIG DEAL THE SCENARIO I had two clients, a couple, book in with me for a debt consolidation structure. Their aim was to take out a new loan to pay o a number of liabilities that were causing them headaches.

The clients had found my website through Facebook. They had been inspired by my education videos on debt consolidation, and their aim was to consolidate some debt to improve their cash fl ow, after spending many nights awake worrying about not being able to pay the bills.

The couple had no money left over at the end of the month. One of them was employed at a big bank, and while she had assumed all her rates were discounted and competitive against other banks, this was not the case.

They were in their mid-40s with two kids and four investment properties, as well as their home. One of these properties was a commercial o ce building with a long-term tenant and a commercial loan attached to it at a high commercial rate.

Their loan rates had started to creep up, and they were no longer happy with their current bank. Everything was paid on time, but only with minimum repayments. The couple also had two credit cards with $30,000 limits each, as well as a car lease.

Two of their loans were interest-only, but three were principal and interest, and two of their credit cards had reached their limits. Overall, the clients’ loan interest rates began at 4.9% and increased to the high 6% range across their properties. The interest rate on their credit cards was 17.99%.

The couple were worried that they would never see the end of the tunnel to paying o their properties, which was their original end goal. They had wanted to use these properties to help supplement their future retirement income.

But with that dream becoming a distant reality, they blamed themselves for getting into this position, despite many external forces outside of their control, such as their car breaking down and then their daughter getting sick.

Initially, they thought the only solution was to get a second job to pay o their debts, or to sell one of their properties as a last resort, which was something they wanted to avoid. THE SOLUTION There were a few options for the client, but I thought AMP looked like it suited Amy Small Regional director and fi nance broker, Professional Lending Solutions their fi nancial situation best.

AMP had a wonderful policy that allowed a customer to consolidate a commercial loan (a loan for business purposes) and restructure it into a residential property, allowing the client to access a better residential rate. This would release the clients’ commercial property from any lending. The only drawback was that this policy had to be under 80% LVR with the remaining properties.

Luckily, the valuations came back looking fi ne and we could move ahead. I was able to secure an approval with AMP and pay o the couple’s credit card debts as well.

This excited the clients – having paid o the title to one property felt like the beginning of their end goal being realised. This meant they were able to refi nance fi ve di erent loans and had interest rates of 3.19% in principal and interest over a 25-year term. The whole process took about one month to secure, approve and settle.

The couple also opened fi ve o set accounts for di erent purposes and were excited to see the savings.

The total consolidation meant a saving of $4,600 a month for the couple, and the funds have been funnelled back into their loans. They are now on track to pay it all o in 12 years without changing their lifestyle.

THE TAKEAWAY The clients were happy with the overall outcome of the loan and they have referred two more families to me since then.

When I caught up with them locally, they let me know they had another $3,000 in savings built outside of the original savings fi gures, and that they no longer worried about not being able to pay their bills.

The key points here are that some lenders aren’t afraid of business lending, which can o er some clients huge savings in the consolidation process, but also that a broker can o er di erent types of solutions, even to the most bank-savvy clients. AB Amy Small, regional director and fi nance broker at Professional Lending Solutions, learns that business lending can o er some clients surprisingly huge savings in the consolidation process, even for bank-savvy clients THE FACTS Clients Couple in their 40s with fi ve properties Loan size and term $1.1m for 25 years Goal To improve cash fl ow Location New Lambton Lender AMP Aggregator Connective The total consolidation meant a saving of $4,600 a month for the couple. They are now on track to pay all their loans o in 12 years without changing their lifestyle