Investing in property in a tight credit market

Housing Market Written by John Bolton, May 21 2020

There’s no doubt that there will be some good buying opportunities over the next twelve months. To make the most of them you will need to be cashed up and ready to pounce. It’s about having the confidence, knowing you can land the deal, but also not misreading your lenders and their lack of appetite for risk.

We are seeing transactions being turned away that would have been no-brainers only three months ago, even below 80 percent LVR. All of the focus is on servicing, and the calculations on servicing will get harder.

Serviceability is key

As a reminder, banks test all servicing on principal and interest repayments over 30 years at an interest rate of around 7.00%. That’s an almighty challenge but it gets harder. They only allow us to take a percentage of the rental income into account.

This week one of the major banks reduced that to 70 percent, removed boarder income and short-term income like Airbnb. Another major bank reduced boarder income to a maximum of $150 and on top of that, tests servicing over a 25-year term. All of the banks are looking at a borrower’s source of income, and in the short term at least, they are being ultra conservative to anyone in the hospitality, tourism or retail sectors.

Talk to a mortgage adviser. They at least have a multitude of options available to them with not only banks but also a growing non-bank market. The non-bank market is getting surprisingly competitive with rates as low as 3.39%. They will use a lower servicing test rate of around 6.00% which makes a big difference, and in some cases, they will look at actual mortgage rates for servicing on mortgages you have elsewhere.

Tidy up your existing portfolio first

Before you even contemplate buying a new property, it’s important to get the structure right on your existing properties and mortgages. This is especially important if in the future you need to go into a non-bank lender because of perceived servicing constraints or bank credit policy.

Non-bank lenders are a little bit more expensive, but they are more flexible around servicing which is a big benefit for investors. Non-banks are more likely to lend up to 80% on an investment property as well creating more headroom. This is also why investors should be using mortgage advisers who can optimise a client over all of the lending options, to make sure your debt structure fits your investment strategy and goals.

Have you maximised tax advantages by getting as much debt as possible tax-deductible?

Have you maximised the LVRs on your existing properties and extracted cash in the form of a revolving credit or offset mortgage for future deposits?

Is your lending split over multiple lenders, so all your eggs aren’t in one basket, and in the case that you sell a property you can guarantee to get some proceeds back?

Insurance policy

Finally, it is also important to make sure you have emergency funds if something goes wrong. We’re talking about funds set aside for no other purpose. Make sure you have enough cash to cover a 20% reduction in rental income and loss of a job for 12 months. You want to avoid any awkward conversations with lenders in this part of the credit cycle.

What’s your plan?

It costs nothing to chat with a Squirrel mortgage adviser and get a plan in place. Get in touch by calling 0800 21 22 30.

We can help. Have a chat to one of our advisers.