Refinancing And Equity Release Under The Post-APRA Lending Landscape
Australian Prudential Regulatory Authority (APRA) reforms have made it harder for investors to convert equity to liquid cash and access interest-only loans, highlighting the need for specialist lending advice. Until April 2015, if you had enough equity in your property and your income could service a higher loan, most lenders would grant an equity release or cash out option. It was also much easier to access interest only loans but since the APRA review, the lending landscape has changed dramatically. It’s more crucial now than ever to avoid inefficient loan structures, which can deter you from achieving your property goal - not to mention being costly and painful to correct. Instead, get things right from the start with these three high impact tips to discover how you can refinance and cash out under the new lending environment.
Access interest only loan as often as possible
Preserve your liquid cash wisely by accessing interest-only loans as soon as you can and stay on them for as long as possible. Your interest expenses are tax deductible on your investment property, unlike principal and interest loans where the principal portion isn’t, nor can it be freely redrawn. Additionally, your periodic principal and interest repayment is often higher than interest only repayments - as an investor, it’s wiser to keep your spare cash in your own pocket rather than the banks. While interest-only loans are now harder to get approved post APRA, take advantage of them where and when you can.
Focus on loan structure and cash availability
Many newbie investors are too focused on interest rates rather than using the most efficient loan structure to their advantage. Post-APRA, almost all lenders are offering cheaper interest rates on principal and interest (P+I) loans, but they may not necessarily be the best long-term choice. For example, your lender may offer a principal and interest rate of 4.09% vs an interest-only rate of 4.90%. While the former may seem cheaper overall, the monthly repayments on a $500k loan equate to $2413 for P&I and $2014 for interest only. This means the interest only loan has monthly cashflow savings of $372, or about $4462 per year. With this cashflow saving, a savvy investor has discretion to allocate this fund back to the bank or deploy it elsewhere, taking control into the investor’s hands NOT the bank’s.
Be organised with your documentation
Prior to APRA’s review, when you needed equity release your bank could solely rely on a verbal statement of intent regarding usage of the funds, then release cash to your account. Now lenders are forced by the regulatory body to document and collect hard evidence on how the funds will be used, with some lenders capping the cash-out amount to $250k. It’s not always easy for people to meet this requirement and we’ve started to see the impacts on those unable to access equity release. We’ve recently worked with a couple who applied for equity release to repay deposit funds they’d borrowed from family. As with many private loan agreements, the initial arrangement wasn’t properly documented and this meant their application was knocked back.
The post APRA review lending environment may seem daunting, but a savvy finance broker can help you navigate through messy bank policy and keep your portfolio on track for long-term success.