Among the property investment industry, there’s an acronym that strikes fear into the hearts of many advisors…
The Australian Prudential Regulation Authority set the lending practice rules for our major institutions.
APRA have at their disposal various options they can deploy to ensure our financial sector remains robust. Those moves can either bolster or limit lending activity and will usually have flow-on effects for values and sales volumes in the property sector.
In recent weeks, APRA launched a directive that’s caused a bit of a stir in the media, and concern for some property industry operators.
However, I welcome this new shift and think APRA is doing exactly what it’s been set up to do.
APRA raises the buffer
When you apply for a loan, the lender will consider a range of criteria to assess your suitability.
One key measure is your ability to service the loan. Lenders want to be sure you can continue to make your repayments throughout the life of the loan, and that it will not cause undue financial hardship for you and your household if things change over time.
So, the lender will include a ‘serviceability buffer’ calculation to see if your finances can tolerate a future interest rate rise. Until recently they would add a hypothetical 2.5 per cent to the interest rate you would be borrowing at, and then run your application against this to ensure you were resilient.
But APRA has changed the guidelines. They now require a serviceability buffer of 3.0 per cent to be applied, which it is estimated will reduce the average total borrowing capacity for the typical borrower by around five per cent.
In the past APRA have employed several measures to police borrowings. For example, in 2014, they instructed lending institutions to reduce the growth in their investor loan book to 10 per cent. They have also been the authority that oversaw the winding back of interest-only loan activity, increased LVR tolerances and more scrutiny of financial records for loan applications.
While APRA’s motivations are to ensure Australia’s finance and lending sector remain robust, there is a flow-on effect from what they do. You see, if they introduce guidelines that restrict the flow of credit either across the board or to a particular demographic of borrowers, then property markets inevitably feel the repercussions.
Less money flushing through the system means less buyer competition and more restrictions on what those remaining purchasers can borrow for a property purchase.
So, it looks like APRA will be stepping up again as our runaway property markets see a wave of increased borrowing – and the authority’s involvement has plenty in our industry running scared…
…but not me. I think APRAs move should be welcomed, not shunned.
Why increased buffers are essential
The backbone of healthy property markets is good financial practices.
In a recent blog, I discussed the importance of stress testing your investment journey across a range of elements, and one of those was around finance.
At ASPIRE, our network of advisors already run a thorough analysis of your finances, including a stress test on your interest rates – and we adopt a potential doubling of your interest rates to see if you can tolerate that sort of rise. That’s more than APRA’s guidelines.
Therefore, Accrue clients are fully prepared for eventual rates rise. They already have plans in place to cope with just this scenario.
I would encourage investors to ask themselves this question – could you survive financially if your interest bill doubled? More to the point, how long could you feasibly hold on before you’d be forced to sell an asset?
To put it bluntly, if you can’t stand the heat, stay out of the kitchen. If you’re not already allowing for a potential doubling of interest rates, you shouldn’t be investing.
APRA isn’t looking to dampen the market – that’s not their role. But this decision will help sift out borrowers who, in my opinion, have no business taking on debts at such tight personal operating margins.
What the regulator is doing is what savvy investors do anyway.
Yes, I welcome the APRA moves. I think it will ensure we continue to operate in a healthy lending environment, and that can only result in long-term benefits for well-prepared investors. It will keep a check on anyone seeking to extend themselves too far and bolster the chances of economic health for investors and the economy not just in the short term, but for years to come.
Always review any property location research and investment analysis data, with a professional, QPIA (PIPA Member) qualified & accredited ASPIRE Property Advisor Network Advisor. Never rely on glossy sales brochures or property marketing information, ensuring a property is right for your strategy. Property Investing is about BUYING a property that matches your goals and aligns with your investment strategy, never be SOLD an investment, know your numbers!
Visit www.aspirenetwork.com.au or call our office to be connected with an accredited and independent Property Investment Advisor on 1300 710 933.