26 Jun Property Investing In A Tight Credit Market
Property Investing In A Tight Credit Market
There is no doubt that there is going to be some great buying opportunities over the next 12 months. To make the most of these opportunities you need to be cashed up and ready to act!
You need to have all of your ducks in a row so you have the confidence, knowing you can land the deal but also secure the finance knowing lenders lack of appetite for risk in the current market.
I am seeing transactions being turned away that would have been no brainers at the start of the year. All of the focus is on servicing and servicing will become harder.
Servicing in more important than ever
As a reminder banks test all servicing on principal and interest repayments over 30 years at an interest rate of around 7%. The difference between actual interest rates and the banks servicing is getting larger and larger. For example the Banks servicing rate for a $500k loan gives monthly repayments of roughly $3,327 compared to a current 2 year fixed rate of $2,025 a month. So this is a huge challenge but it gets harder. They only allow investors to take a certain percentage of rental income into account.
One of the major banks has recently decreased that percentage to 70% and also removed boarder income and short- term rental income such as Airbnb. Another bank has reduced boarder income to a maximum of $150 per week and also reduces the test servicing from a 30 year term to 25.
While another bank has reduced boarder income altogether. All banks are taking a much closer look at a borrowers source of income and are being very cautious to anyone in the hospitality, tourism or retail sectors. Self employed income has become even more harder and many banks are needing a cashflow or P&L forecast for the remaining of the current financial year to ensure it stacks up with 2020 financials.
That is why it is key to talk to a good mortgage adviser. They have a lot of different options that may suit your particular needs, but not only that they have access to a growing non- bank market. The non-bank market is becoming very competitive with rates as low as 3.39%. They also use a lower servicing test rate of around 6%, not only on the property you are looking to purchase but also the rest of your portfolio. Which makes a huge difference.
Tidy up your existing portfolio and expenses
Before you look at purchasing another investment property, its important to get the structure on your existing properties right! Even more so if you are needing to go to a non-bank lender because of servicing constraints with your current lenders or because of tight bank credit policy.
Some questions to think about:
Have you maximised tax advantages by getting as much of your debt as possible tax deductible?
Is your lending split over multiple lenders? If not why not? And are you prepared that if you may need to sell a property that you may not see the sale proceeds because you have all of your eggs in one basket?
Have you maximised the LVRS on your existing properties and extracted cash in the form of a revolving credit so it can be used for future deposits?
Have you minimised Your unused credit card limits? Having a 20k limit may sound useful but it can also stop your growth as you are automatically decreasing your servicing by $600m a month from just having this $20k limit
Non-bank lenders are a little bit more expensive, but they are more flexible around servicing which is a big benefit for investors. Majority of the non-bank lenders will allow a 20% deposit giving more purchasing power for investors.
What’s your plan?
It is essential for property investors to have a mortgage adviser who can best fit all of the lending options to make sure their debt structure fits their investment strategy and goals!
Its free to chat with Dixon Mortgages and get a plan in place or back on track