The lending landscape has changed significantly over the last 18 to 24 months with more changes to come. As of now, find 7 tips to navigate the new and evolving lending landscape:
- Due to APRA regulations, lenders are now limiting Interest Only (IO) loans to Loan to Value Ratios (LVRs) of 80% and below. This means where you borrow more than 80% of the value of the property, you need to make Principal & Interest (P&I) repayments. Whilst it is not ideal to be paying down principal on an investment property (for tax deductibility reasons and investing the principal elsewhere), opting for a higher LVR means, you can spread your funds across multiple properties with smaller deposits. On the flip side, you will be creating equity in your property as you pay down the principal as you go
- Consider fixing your interest rates for 2 to 3 years so you are future proofed from rate rises for a period of time and lowering the holding costs whilst paying Principal & Interest on LVRs greater than 80%. This will give you surety of what the cash flow will be over a period of time, without the current volatility in the lending market
- When drawing down equity, you may want to consider borrowing up to 88% for your home / Principal Place of Residence (PPOR) plus Lenders Mortgage Insurance (LMI). Whilst the LMI cost won’t be tax deductible for the bulk of the home loan, you will be able to maximise the opportunity due to the larger equity pull (which would otherwise not be possible at 80% LVR). This will provide greater funds available for investment purchases. Thereby allowing for larger deposits on your investment properties to enable an LVR of less than 80% and therefore the option to make the investments Interest Only (IO).
For instance John owns a property worth $700,000 and owes $350,000
- 80% of $700,000 is $560,000, with available equity of $560,000 less $350,000 = $210,000
- 88% of $700,000 is $616,000, with available equity of $560,000 less $350,000 = $266,000
- 88% LVR is a sweet spot for LMI (approx. 2%). For LVR’s over 88% LMI rises sharply
- Make sure you work with your broker to choose the most suitable lender as different lenders have different offerings such as cash out policies. Incorrect lender selection with limitations on cash out policies, especially where LMI is involved will limit you from moving forward with your investment goals
- Work with an investment savvy mortgage broker who would look at your goals and understand what you are trying to achieve so they can advise accordingly. It’s more important than ever to not be solely transaction focussed. Lender selection needs to tie in with your end game
- Suitable loan and lender selection is much more than just the interest rate. Often people get hung up on the interest rate and in the end face opportunity cost due to the decisions made and lenders selected which may inhibit portfolio expansion. This is more important than ever with the changing lending landscape.
Always seek credit and tax advice suited to your personal circumstances and needs.
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