Investing in the Australian property market has become famous for Australian expats and foreign investors alike who are searching for strong profit and financial stability. However, APRA has required some changes to the investor lending limits related to Australian banks’ growth rates. Essentially, approvals for new investment loan will slow to less than 10%.
The reason for this change is the increased investment in the property market, compelling price growth of all property all over the country, particularly in Melbourne and Sydney. This brings related problems regarding affordability and is worsened by a record low-interest rate environment.
If you are not an Australian citizen but you are interested in investing in the property market, one of the first things that you need to learn is about APRA.
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What is APRA?
APRA stands for Australian Prudential Regulatory Authority. Established in 1998, it is an autonomous legislative authority that oversees institutions such as:
- Insurance companies (health, life, and general insurances)
- Building societies
- Credit unions
- Organisations within the superannuation industry
Unfortunately, APRA imposed a rule in March 2017 that the lenders are required to do the following:
- Moderate the number of interest-only lending at loan-to-value ratios above 80% (if you going to borrow up to 80% of the property’s value.)
- Limit instances of interest-only lending at an LVR higher than 90%
- Remain under the previously prescribed scale of 10% growth
- Ensure and review serviceability parameters, which includes interest rate and net income buffers, are set at the right levels for current conditions
- Continue to limit lending growth in higher risk parts of the portfolio like high loan-to-income loans, long-term loans, and high LVR loans.
What does APRA restriction mean for foreign investors?
These restrictions forced lending institutions to become stricter when it comes to approving loans, especially to new investors. Foreign investors might be scared to purchase a property at first because of the restrictions that APRA put into place.
Here are five obstacles that you might encounter when looking for a loan:
Higher serviceability requirements
The new regulations that APRA set have made the lenders to tighten up their qualifications. It all comes to the need to take a few high-risk loans. This means lending institutions will make sure that you can make your payments as a new investor. This could mean that they’ll look for ways to ask you for more proof of income. Also, the lenders will take more time examining your documents.
The lenders will increase their affordability limit. As a foreign investor, you will feel that you have less borrowing power. If you feel this way, it is highly recommended to talk to a lender first before searching for a property to invest.
Different payment assessments
Before APRA intervened, lenders will judge an investor’s repayment abilities based on the kind of loan he or she took out. This meant that an investor can get more funding for interest-only loans. This is because of the low monthly repayment requirements for such loans.
But this is going to change with the new rules. Today, lenders will now evaluate your ability to repay an interest and principal loan. They will do this even if you applied for an interest-only loan. You may also have to pay higher interest rates.
This creates a problem for foreign investors who cannot easily use their foreign money. This is due to the fact that you will be judged according to your capacity to pay for future loans.
You can’t rely on rental income
If you already have a property in Australia, you will find that you won’t fully rely on your monthly rental income anymore. Most lenders have placed limitations on this, according to the new APRA guidelines. If you are the type of landlord or property owner who uses 80% of your rental income as payment for loans, then this will pose a particularly new challenge on your repayment schemes.
Location and the type of investment matter more
The location and the type of the property will matter more in the wake of new APRA rules. However, each lender approaches this differently.
There are some lender who will give you a loan even if the property is in current development. Others may prefer commercial rather than residential properties. This results in having to widen your search for a good lender or have to face tougher requirements just to get the money that you need.
The situation is not yet permanent
If there’s good news about the new APRA regulation, it is that the whole situation is not yet permanent. This means that APRA may still encounter unusual issues in the coming years.
However, don’t make assumptions yet. It is highly recommended to speak to a professional before you apply for loans. A good mortgage broker may be able to help you locate lenders that are willing to serve beginner investors.
These new APRA regulations have certainly affected both old and new investors. With these restrictions in place, you will find it harder to get an investment loan. However, it is not completely impossible to get a loan in the current market climate. In addition, if you have a good income and strong equity, you will certainly find the right lender that will risk approving your proposed loan. You just need to know exactly where to find the right lender that could help you out. It’s also good to find the right property.
If you are interested in securing a loan, feel free to contact us so we can connect you with a specialised mortgage broker. It would be our pleasure to help you.