The current record low interest rates have seen a greater increase in investor lending with Australians and overseas buyers purchasing investment properties, leading to investment loans growing at 21 per cent each year. The Australian Prudential Regulation Authority (APRA) are concerned that a housing bubble is beginning to form in Australia and have brought in a policy change to limit investor lending and help cool the Australian property market.
APRA want to limit investors purchasing property with small amounts of equity like they previously have and have advised banks to slow their investor lending, which has led the banks to adopt new lending criteria for investment loans. This new criteria includes:
- Higher servicing rates – when the banks assess a home loan, they use a servicing rate to determine if the borrower can afford the loan. This rate has now been increased, which means borrowers are limited to how much they can borrow from a lender.
- Loan to Value restrictions – most lenders have adopted a 90% loan to value ratio including the lenders mortgage insurance policy, which means that you can no longer borrow as much against an investment property. This new change means borrowers need to demonstrate and prove that they have more cash or equity available to purchase an investment property through a lender.
- Income/expenditure scrutiny – some lenders have adopted a stricter income scrutiny method meaning borrowers will find it harder to borrow if they earn commission, allowances, and overtime. Combined with other home loan expenses, the banks are now adopting a higher repayment then what they once did for other home loan repayments. Investors will find that their borrowing capacity is affected, which will push them to opt for lower valued properties.