Investor interest rates under 4% – hooray.
APRA, the industry prudential regulator initially focused on lenders who have been significantly growing their investor porfolio, this includes the Big 4 ( including their subsidiary arms eg: Bankwest . However the net has now widened to include all regulated lenders and they are now considering unregulated lenders.
One of the main focus issues is Interest Only ( IO) borrowing – as used by negative gearers. ASIC and APRA are very tough on this issue and insist that a borrower has a sound reason for using IO and that does not include lowering repayments. Where as in the past IO loans allowed you to borrow more – because repayments were lower, this opposite is now the case. If you take out a 25 year mortgage with 5 year IO period then the lenders must calculate your repayments based on P&I over the remaining 20 year period and so for servicing calculations your repayments are much higher.
The banks reactions has been to tighten lending policy but each lender is doing so in their own way. For some it means less rate discounting for others lower LVR and others less generous servicing. It is not uncommon for borrowers with existing portfolio to find the not only can’t purchase more property – they may not be able to refinance their existing portfolio.
In some cases it may be worthwhile to consider P&I rather than interest only as this is the main area of focus. Of course this may not work with your negative gearing strategy however the current ‘clamp down’ won’t last forever – it is a reaction to the Sydney property bubble.
Borrowing for Shares or other investments
This is normally done using a line of credit (LOC) secured against existing property. Unless you have a clearly demonstrated history of successful trading you can expect the lenders to require you to provide a letter or certificate of advice from a licenced financial adviser confirming this strategy. Lines of credit have in general become less available since the GFC and ATO focus on their use has made them less popular – however they do still have a legitimate place in an investment finance strategy.
Getting started as an investor
Most investors get started by leveraging the equity in their family home and this is largely covered in our home equity loan information although buying in partnership is also now quite common usually as “tenants in common” and this comes with its own significant issues. It’s important that you understand how lenders calculate your available equity watch our short video below:
For all investors with more than two properties there is another major issue ie: avoiding cross collateralisation while still maximising your ability to leverage equity and negotiate discounts. Today this can usually be structured through lenders using packaged loans which provide multiple individual loan accounts under one umbrella annual fee. There can be a trade off between these two competing needs and some lenders will insist on crossing however, recently more lenders are pricing maximum discounts without the requirement to cross the securities.
For most investors with a negative gearing strategy the single fundamental requirement is interest only ( refer above ) and preferably with a long 5 or 10 year period or an option to extent this. However keep in mind that unless the loan is a line of credit it is by definition a ‘term loan’ ie: a loan with a specified term, typically 25 to 40 years. With a term loan a lender must require the loan to be repaid and must provide for a reasonable period to do so. Therefore it is unrealistic to expect a lender to extend an interest only period beyond 10 years and many lenders will not do so beyond 5 years. As a result your only option is to refinance and that is where crossed securities can become an issue.
Of course we believe that you should review your loans at least every 3 years in order to ensure that you are still getting the good deal that you originally signed up for. Yes we do earn new up-front commission on refinances however we also incur costs and often receive lower trail commission on refinanced loans so believe it or not we don’t recommend a refinance unless you will be materially better off.
Buying an investment property without a deposit.
I am afraid that the days of first time investment buyers with no existing assets borrowing 100%, with no deposit are over and many believe that they will never return. That’s not to say that you can’t structure your borrowing to allow you to maximise your tax deductions.
When talking about 100%+ investment loans most savvy investors mean they are using 100%+ borrowed funds ie: they have borrowed the purchase price and all costs. However that does not necessarily mean that they have borrowed all the funds using one security or using one lender. In most cases they need to offer other security to make up the equity shortfall and in this way completely avoid LMI but maintain the maximum deducibility for their borrowings.
A great deal also depends on your investment strategy ie: positive gearing or negative gearing. Positive geared properties are typically high rental yield, low entry cost such as small regional towns or small inner city apartments or even student accommodation. These properties offer you the investor strong returns however as the security they are less attractive to lenders. You can expect lenders to offer lower LVR and discount the rental returns on some of these securities. The result is that you may have a good cashflow however you may not be maximising your use of your equity. Negative gearing is aimed at gaining tax and asset appreciation advantages and are typically in metropolitan bricks and mortar.
Before we go any further we need to stress that this is not tax advice, you should seek advice on your individual circumstances from a qualified tax adviser.
Let’s say you have a property worth $300,000 with a current loan of $150,000 and you want to purchase a new investment property worth $250,000 and maximise the borrowing for best tax results. If you want to avoid LMI you need to come up with roughly 24% to keep your new borrowing below 80% plus stamp duties etc. So you refinance existing property to $210,000 (usually with a new sub-account for the additional $60,000) and you borrow $200,000 using the new property as security. Thus your total deductible investment borrowing for the new property is $260,000 or 104% of the purchase price.
There are many other implications particularly where you are using your owner occupied property as the first security – WARNING – You should not use a redraw to access the equity for investment purposes. There are also potentially serious implications on using an offset account – so please talk to us before you make any commitments then seek clear taxation advice.