Regulators call time on housing market party.
This was one of many headlines I read over the past week forecasting doom and gloom for the housing market on the back of APRA’s changes to servicing.
It is big news, and will have an impact, but I don’t think it’s time for doom and gloom just yet.
For those not familiar, APRA stands for the Australian Prudential Regulation Authority. Basically, they are a government body that supervises and set rules for the banks to follow. It was established to make sure banks are lending responsibly and to stop borrowers taking on more debt than they can handle.
One of APRA’s rules is that anyone trying to get a loan from a bank has to be able to show they can repay the loan at a higher interest rate. This is to make sure anyone borrowing money will still be able to make their repayments if interest rates increase – a buffer.
That buffer was increased from 2.5 per cent to 3 per cent as of last week. For example, if a bank’s interest rate is 3 per cent, as a borrower you have to be capable of making repayments if the interest rate were to increase to 6 per cent (3 per cent interest rate plus 3 per cent buffer) in order to get the loan.
What does it mean for homeowners and investors?
There are three things I take away from it:
- It will have a 5 per cent impact. A couple earning $150,000 has gone from being able to borrow $1,050,000 to being able to borrow $1,000,000.
- There are probably going to be some more restrictions in time. So, make the most of the opportunities you have today.
- A good broker or banker has just become a little bit more important as a member of your investment team.
Number 3 leads to my Bulletproof tip for this week.
INVESTING IS A TEAM SPORT
You need a good accountant, mortgage broker (or banker), property manager and mentor. Don’t be afraid to pay a little extra for a good team — it’s a smart investment.
In my book I wrote about the fact that no one achieves success without help.
As a property investor, that help comes from a few crucial people – mentor, accountant, mortgage broker (or banker) and property manager.
They’re all important and play a critical role (hence why I dedicated a chapter and bulletproof tip to them).
I use a mortgage broker and have done since day one
Banks change their policies more often than most people change bed sheets. One month they will lend you 90 per cent of the property’s value, the next month it could be 70 per cent. One month they will count all of your commission, overtime and rental income, the next month it could be 50 per cent. The same applies to their interest rates, buffers and debt to income ratios.
The APRA rules and regulations only exacerbate the rate of change.
Then there’s the ‘non-banks’ (i.e. companies that loan money but aren’t a bank, e.g. Pepper Money) that charge slightly higher interest rates, but don’t have to apply the APRA rules and regulations.
A broker can usually access up to 50 banks and non-banks. I like that flexibility and also prefer to use a broker who owns property themselves.
As an aside, some people get similar service and flexibility from a banker, however you typically have to be self-employed, a high-income earner or employed in a particular industry to do that.
Before I finish, a couple of important points.
House prices won’t continue to go up forever. I don’t think they’ll crash, but at some point, growth will flatten out. Don’t expect to make money quickly otherwise you’re doomed for failure. Yes, it’s nice when it happens quickly, but don’t go in with that expectation. Play the long game.
No one should take on too much debt, even if it is ‘good debt’. You can’t eliminate risk when it comes to investing, you simply have to manage it. As a rule of thumb, I always work out the numbers based on interest rates going up by 2 per cent. APRA is slightly more conservative with their 3 per cent buffer.
If you’re fortunate enough to be in a position to do something today, do it. You never know what’s around the corner…
Question
You talk about cash flow being important when it comes to property. What about commercial property? Wouldn’t commercial property offer better rental returns and longer-term leases?We’re trying to buy our home and are participating in ‘online’ auctions. What are your thoughts on Zoom auctions, and do you have any tips or tricks you can recommend?
Answer:
Great question and yes, commercial property does typically give you a better rental return – around 5 to 9 per cent, depending on the type (compared to 3 to 5 per cent for residential).
However, I think the right residential property offers better returns over time and less cash flow ‘risk’.
With commercial property, you typically get long-term leases with higher rental yield. However, when the tenant leaves it’s harder to replace them than it is with residential property. You can be waiting up to six months for the right tenant, and even then, you normally have to offer an incentive like a rent-free period or contribution to their fitout.
Similarly, banks require you to take out a ‘commercial loan’ for commercial property. That’s important because commercial loans only last two to three years. At the end of that period, you have to reapply for the loan. That means getting a valuation and showing your income. If the valuation or your income has decreased, it can impact your ability to renew the loan. Residential property loans last for 30 years and, provided you make the repayments, there’s no need to reapply during that period.
I acknowledge there are people who have done very well out of commercial property, but I find residential property works better for me personally.
It’s never too early or late to grow your wealth
P.S. Personal finance is cited as the single biggest cause of stress for one in two Australians. It doesn’t have to be the case for you. Get the book.
