The 2015 calendar year saw some very interesting and challenging movements in the financial sector as well as the property sector. During 2015, we saw record property sales with high clearance rates at auctions. This “boom” has been a concern during the year.
We also saw the Reserve Bank of Australia reduce the RBA Cash rate to a record low of 2%, with saw financial institutions reducing their mortgage rates to compete in the fierce residential home loan market.
With high numbers of borrowers entering the investor property market, the banks regulatory body, APRA was becoming alarmed that lending to property investors would and did exceed the benchmark of 10%.
This has caused the banks to rein in their investment lending by firstly increasing investment interest rates and secondly reducing the loan to security ratios. In addition, they have significantly modified their credit criteria for investors .
More recently several lenders have scaled back even further, with a second tier lender withdrawing their investment lending altogether.
Apart from the tightening in investment lending, we also have seen the lenders revise their overall criteria for serviceability.
Some areas visited were :-
- Increase calculated household expenses to account for increase in cost of living
- Increase the lenders
- “serviceability/ stress ” rate
- Increase other lenders monthly repayment to ensure the external debts are cleared within set time frames
- Looking more closely at the applicants transactional bank statements to ensure all stated repayments are being met
Recently, the major banks not only increased investment residential interest rates, but have also increased the owner occupied home loan rates. (The recent increase in interest rates according to the banks, is to partially offset costs associated with recent changes to capital requirements.)
During the year, we have seen the departure of some lenders in this arena.
The overall criteria in this sector remains very stringent and ASIC compliant but we have lenders still doing quality transactions.
The point to note if borrowing via a superfund, is that after the purchase of the investment, that the superfund has sufficient funds retained.
An example is :-
Funds held in super is $ 200,000. If the fund purchased a property for say $ 500,000 . The max loan amount would be 80% if purchasing a residential property .
Therefore the fund would need to contribute a minimum of 20% plus costs, leaving approximately $100,000 retained in the fund ( prior to associated costs. i.e. stamp duty, legals etc )
The funds retained would decrease if the SMSF was purchasing a commercial property as the loan max would be 70%.
Therefore, careful consideration should be applied if there is not sufficient reserves in the fund. Some lenders require a balance of $100K held in the fund post purchase.
Recently, the Self-Managed super funds have come under the scrutiny of David Murray’s Financial System Inquiry and more recently ASIC.
Overall, it is paramount that should you contemplating borrowing in a SMSF, that the borrowers fully understand all the risks involved in the asset purchase and the compliance involved.