Investor finance options aplenty in complex market

With Australia’s housing finance landscape in flux, mortgage expert Marcus Roberts details the many options available for investors looking for the best deal to build their portfolio.

When Treasurer Josh Frydenberg announced plans to unwind responsible lending laws last September, house prices in most capital cities were stagnant and Australia’s economy was in a perilous position. 

The aim was to generate more spending to stimulate the country’s sputtering economy, allowing the average customer to borrow around $70,000 more than they could previously, and to cut red tape for borrowers and banks. 

But since September, Australian property markets have undergone a swift turnaround, and rising prices across the country require dampening, not additional fuel.

In a wide-ranging interview about investor finance and investment planning, Marcus Roberts, founder of mortgage brokers Bright Finance, told Australian Property Investor Magazine that many of the restrictions placed on access to property loans had been wound back to pre-2020 policies.

“Anecdotally, it seems lending tightened then eased over the past 12 months as financiers got a better handle on the effects of COVID-19,” Mr Roberts said.

“In the early days of the pandemic, many banks placed restrictions on certain employment industries, such as tourism and hospitality, added specific questions about the pandemic’s impact on applicants, added check verification calls to employers, and even reduced loan to value (LVR) maximums for certain lending types.

“Now if you're a new investment property investor, as a PAYG (pay as you go) employee it becomes more a question of serviceability, while self-employed applicants do have additional requirements they might not have had a year ago.”

The Reserve Bank of Australia says it “does not target house prices” but has flagged that there are signs of a deterioration in lending standards. 

RBA Governor Philip Lowe said: “there are many moving parts (in the property market) at the moment”.

He specifically noted record-low interest rates, a shift in preferences towards detached houses and regional locations, government incentives for first home buyers, and the “slowest population growth in a century”.

“Furthermore, there have been high rates of house building and a considerable decline in apartment rents in Sydney and Melbourne,” Mr Lowe said.

Mr Roberts said despite the conflicting variables at play in the market, investors should simply focus on buying the property that meets their own aspirations for that asset. 

“If the goal is yield, what are the benefits of purchasing something ready to go versus investing with the intent of generating a better yield, post-renovations for example,” Mr Roberts said.

“Being analytical in your approach and understanding the hard numbers behind the purchase you're looking at will help cut your options down to what’s attractive and suitable.”

Recent data from the Australian Bureau of Statistics (ABS) showed that detached housing approvals reached new highs in December 2020, rising 15.8 per cent in that month. This is the largest number of approvals since the records started being kept in 1983.

Mortgage applications surged in the December quarter amid a slump in consumer credit applications, with WA the standout, according to  the data.

Figures from data company Equifax revealed that mortgage demand (which includes loans for new properties and refinancing) continued to trend upward, with home loan applications for the December 2020 quarter up 19.3 per cent from a year ago. The total value of new housing loan commitments rose by 8.6 per cent in December 2020.

“One of the most significant effects we have seen remains the difference in lending rates for interest only versus principal and interest loans, in addition to utilising buffer rates over actual repayments at sometimes close to double actual rates,” Mr Roberts said.

“In my own experience, it has led to a reduction in borrowing power for new investors that many weren't expecting prior to thinking about their lending options.”

More than the Four

There is a widely held perception that online banks are somehow less safe and secure than the so-called Big Four banks dominate the lending market.

But most major online banks are covered by the Federal Deposit Insurance Corporation (FDIC). 

If you open a deposit account in an FDIC-insured bank, you are automatically covered for $250,000 per depositor, per insured bank, for each account ownership category. 

They also boast the standard security and fraud protection features, such as multi-factor authentication, data encryption, and account monitoring.

“Unless you really need a branch network or are wedded to a major bank for some reason, online banks definitely offer money-saving potential for investors,” Mr Roberts said. 

“Getting the most cost-effective loan with the features you want or need should be a major priority. 

“The biggest hurdle with many first time purchasers when thinking about non-household names is the brand recognition but once you work out that the cost may be $30 to $120 per month for the next 25 to 30 years, the name often takes a back seat!”

To help build equity quickly, Mr Roberts recommended choosing a principal and interest repayment type, which will immediately start building equity from day one. 

Making additional repayments, where possible and appropriate, will again assist in building that equity, he said.

“Cast your eye over the property, inside and out to determine where capital injections may assist with a potential purchase price,” Mr Roberts said.

“As an example, will a $25,000 kitchen renovation lead to a $40,000 increase in the potential sale price once completed? 

“Rent reviews when tenancy contracts expire to stay at market rates will ensure that any future buyer sees an attractive yield as a headline in the listing, should you go to sell.

“The best investors are those who take emotion out of the equation and focus purely on capital growth and yield opportunities rather than the prettiest house in the street, doing what they can to improve serviceability and ensuring they understand their cash flow position both now and post-purchase.”