by Jye Smith
With Australia and most of the world learning to live with COVID-19 through high vaccination rates, borders starting to open, businesses opening up and lockdowns now a thing of the past, confidence is beginning to increase in the property market.
The COVID-19 pandemic assisted in supercharging prices in the property market through the increase in building grants for residential construction, first home buyer grants, record low interest rates, and people purchasing holiday homes instead of overseas trips, just to name a few factors. This has all contributed to less supply and heightened demand in the property market, making stock very scarce.
How The Lending Landscape Is Changing
High property values and low interest rates have allowed buyers to borrow more, fuelling higher levels of household debt and an increase in property prices. This cannot continue and changes to the lending landscape will be made to curb this trajectory.
Some of the measures that have and will be introduced to do this are:
- Increase in the serviceability buffer rate from 1 November 2021: Lenders have had direction from their governing bodies to increase this assessment metric. The buffer rate previously assessed loan interest rates at 2.5% over the market rate, which has now moved to 3%, reducing how much can be lent. The buffer rate is in place to ensure repayments can be met if and when rates increase as time goes on. This reduces borrowing power in the hope it will slow increases in property prices and levels of household debt.
- Debt to income ratio (DTI): Most lenders have a debt-to-income ratio which is based on how much your available net income is compared to your level of debt. This works in conjunction with the servicing buffer rate and varies lender to lender based on their risk appetite. For example, your annual wage might be $50,000 post-tax and your rental income might be $30,000 per annum, but lenders sensitise this figure to say 80% ($24,000), so your total annual income is deemed to be $74,000. If the ratio of debt to net income is 7:1, then your lending capacity would be $518,000, but if the ratio reduced to 6:1, available lending would only be $444,000.
- Fixed rates are beginning to increase: This has a negative effect on borrowing capacities and indicates rate rises are coming, with rates now beginning to climb out of the sub-2% space indicating the shift in the market.
How This Affects You
To demonstrate the impact of the above changes, let’s say you’re an investor and your investment loans are interest only for taxation and investment purposes. In the next 1-2 years, your interest only period will expire, and you want to reinstate this to support your strategy.
To do this, lenders will need to complete a full application. Whilst that might be possible now, the changing lending landscape as outlined above may hinder your ability to qualify for interest only, meaning you may be caught out and have to pay principle and interest, with your monthly commitments increasing or you may need to sell a property to pay down your debt levels.
In addition to this, with fixed rates rising and variable rates to follow, now is a great time to look at locking in rates before they start to increase and to ensure your structure is future-proofed, which would assist in minimising the impact of future interest rate increases.
How We Can Help
The team at Lambourne Partners can help you with holistic advice around taxation, accounting, finance and wealth as relates to property purchasing, refinancing or investing. If you’d like to arrange a free, no-obligation discussion with us, please contact us below or call (02) 4969 6600.
The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.