Is your property portfolio ready for the new credit regime?
If you don’t already know, the landscape for property investors changed substantially this week, but it has nothing to do with the property cycle or the supply and demand issue some areas are facing.
Blogger: Victor Kumar, Right Property Group
Instead, property investors have been given a financial handicap.
So how does it impact you? Well, to understand this, we need to look at how the banks were qualifying you for finance prior to this new regime coming in.
They had a “qualifying” calculator, which took into account your income, living expenses and loan repayments.
The loans you were applying for were always 'loaded' (or "stressed" in lender speak) at a higher rate, usually between one to two per cent above their standard variable rate. Some lenders took an interest-only repayment into account whilst others took a principal and interest payment approach to arrive at that expense.
Other financial institutions' debt was usually taken at its actual repayment amount rather than the “stressed” amount.
Essentially, this meant that if you had say $1 million debt with one lender, they would be able to lend you a lot LESS than if you spread the love around. Other lenders however would be able to lend you a lot more!
Enter the new credit regime.
Under the new regime ALL loans - regardless of whether they are with the lender you are applying with right now or with a different bank - will be calculated at a higher stressed rate, at 7.5 per cent, at principal and interest repayments. (The actual interest rate that you would be paying hasn’t changed….yet, but the qualifying rate has changed substantially.)
Put simply, if you had $1 million in debt, the lender would have previously allocated $50,000 a year to service that debt if it were with another lender. NOW, that debt would be allocated at least $75,000 a year in expense to service the same debt, regardless of whether you have a five-year fixed rate of say 4.79 per cent interest only or if you have a variable at say 4.3 per cent.
This will have a severe impact on your ability to qualify for loans, especially when you have a multiple-property portfolio, most of which are negative to start with.
To cater for these changes, your portfolio needs to be adjusted - you may need to bring forward any construction or renovations that would substantially increase your cashflow, and also coming into the tax season, if you own a business or work on commission, your accountant may need to adjust how you report your income so that you can continue building your portfolio.
For some, it may mean that you now need to take a break, and wait for the finance market to stabilise, before you add to your portfolio, or start consolidating your portfolio.
Since November last year, I have been working with the my clients who all have multiple properties, placing properties in their portfolio to help counteract the negative impact on portfolio progression that this new finance regime is going to bring in.
Given that many brokers and indeed quite a few investors aren’t across the constraints this will bring to their property investing ambitions just yet, this would be the ideal time review your strategy to re-align with the changing game plan.
