Borrowing capacities have decreased
Do you have an existing home and/or investment loan and are considering buying further property? You will find your borrowing capacity has decreased. The effect is amplified the greater your existing lending and if you have a high proportion of interest only loans.
Why is this happening?
Banks and lenders have been tightening up their lending criteria. This is a response to APRA’s ongoing focus on reducing investment lending plus concerns about borrowers potential to cope with future interest rate increases.
Most banks and lenders have introduced two measures that have a high impact on future borrowing capacity;
- Lenders assess existing loan repayments at the lenders current assessment rate( or a loading on existing payments) not actual repayments.
- Interest only loans are assessed on the remaining principal & interest term at the lenders assessment rate.
The impact can be significant. An example of each;
- You have a $400,000 loan with principal & interest payments at a current rate of 4% over 30 years. Your actual repayments are $1910/month. A lender applying an assessment rate of 7.4% would assess repayments on this loan at $2770/month.
- You have an investment loan of $400,000 at 4.2% with a 5 year interest only period. Actual repayments are $1400/month. A lender applying an assessment rate of 7.4% will use the remaining principal & interest term of 25 years and assess repayments at $2930/month.
Borrowing capacity could reduce by $124,000 in example 1 and $221,000 in example 2 c.f. with previous methods of using actual repayments for existing loans.
The impact of these decisions are being felt. Investors with multiple existing loans find their capacity to buy more property is reduced. Home owners wanting to buy another home and retain the current property as a rental property will find their ability to borrow reduced.
Planning to buy further property will take more forethought and preparation now than it used to. Perhaps this is not a bad thing.
Leave a Reply