Unlocking the equity in your home could help you purchase another. Chief executive of property advisory firm Property Mavens used her home’s equity to buy a Preston investment property. Picture: Lawrence Pinder
WE’VE all heard of the benefits of refinancing to get a better deal on your home loan, particularly a more competitive interest rate.
But what if refinancing could also help you buy an investment property?
“Borrowers may be able to refinance their existing home loan to access equity they may have built in their property, in order to buy an investment property,” Mortgage Choice chief executive Susan Mitchell said.
Refinancing with the aim of buying an investment property could allow borrowers to grow their wealth, according to Ms Mitchell, as, generally speaking, property was considered a safe asset class in Australia with decent returns over the long term.
“CoreLogic found that over the 10 years to June 2018, national dwelling values increased by over 40 per cent, a good return on investment,” she said.
But she cautioned there were a number of costs associated with refinancing, so it was important borrowers made an informed decision before jumping in.
The nuts and bolts
So, how does refinancing using equity work?
The Successful Investor managing director Michael Sloan explained that lenders would typically lend you 80 per cent of the market value of your home, less the debt you still owed against it.
“This is your usable equity as banks hold some back as security,” he said.
“So, say, for example, you have a $500,000 property and a $200,000 loan. Your usable equity will be $200,000,” he said.
As to what value investment property you could buy, Mr Sloan said a simple rule of thumb was to multiply your usable equity by four.
“But remember that one of the risks of property investing is spending too much,” he said.
“You need to buy well below the median house price ($742,000 in Melbourne, according to CoreLogic), in fact you shouldn’t be within $200,000 of it.”
Ms Mitchell said the figure depended on how much a lender determined a borrower could afford to repay.
“Available equity is important but the key factor a lender needs to consider is how much a borrower can afford,” she said.
“If a borrower does not have additional capacity to repay a proposed new loan, they may not be able to borrow, irrespective of how much equity they may hold,” she said.
Where do I sign?
And there’s the rub: having equity in your home is not a guarantee you’ll be able to access it.
“You can have a million dollars of equity but if you don’t satisfy the institution’s lending criteria, they are not going to loan you any money,” Mr Sloan said.
“The bottom line is they will take everything into consideration: for example, how many children you have, as the more you have the less you can borrow, your work situation and how much you spend on everything from your daily coffee to the tyres on your car.”
Lenders have also tightened their assessment procedures as a result of recent regulatory measures, such as The Australian Prudential Regulation Authority (APRA) imposing a 10 per cent benchmark in growth on investment lending last year.
This was introduced in a bid to curb activity in the housing market, Ms Mitchell said.
“These regulatory measures have resulted in lenders increasing their scrutiny of a borrower’s ability to service a loan,” she said.
“When deciding if an applicant can afford a mortgage, a lender will consider a borrower’s available ongoing income and from this allow for existing debt commitments and living expenses,” she said.
“Their decision will also factor in a buffer for potential increases in interest rates.”
But it’s not all doom and gloom. Ms Mitchell advised that borrowers could overcome the increased scrutiny by getting “financially fit”.
“Get out of debt, spend your money wisely and adopt a disciplined savings strategy to show lenders you can service a loan,” she said.
Air Mutual director Damien Lawler advised would-be investors to consult an independent broker who could access a range of lenders, which might have varying assessment procedures.
“Everyone is talking about the banks tightening up – which they are – but there are banks, particularly the smaller, tier-two banks, who are still lending,” he said.
And finally …
Mr Sloan said his No.1 piece of advice for would-be property investors was to play it safe and to have some funds in reserve if things go wrong.
“You should never buy (another) property if you have no extra money available to you after you settle, so you need to have a buffer. And protect what you are building with income protection and life insurance, if you have a partner,” he said.
Property prices across the country saw their steepest fall in 15 years in 2018, bringing them back to 2016 levels in what has been a housing downturn like no other.
But it’s not bad news everywhere – while investors shy away from Sydney and Melbourne, there are some hotspots which are enjoying a sudden property market boom, according to news.com.au.
The South East and Gold Coast regions are seeing the most buying activity, with Brisbane, Moreton Bay, the Sunshine Coast and Ipswich booming along with the Gold Coast, Tugun and Burleigh Heads.
Unsurprisingly Hobart is the strongest property market, although activity has spread beyond the inner city and into the middle and outer rings, while Launceston has also recorded solid interest.
The entire South Australian capital is booming, although most activity is happening in the inner city and Adelaide Hills.
New South Wales
While many investors have deserted Sydney, areas such as Paddington and Winston Hills and the nearby Central Coast are doing well.
Other booming areas are further north in Tweed Heads and Byron Bay.
View from the experts
Daniel Walsh of investment buyer’s agency Your Property Your Wealth, told news.com.au that investment activity has now firmly shifted to Queensland.
“We’re seeing rising demand particularly in the housing sector in southeast Queensland where yields are high and jobs are increasing due to the amount of government expenditure around infrastructure which is attracting families to the Sunshine State,” he said.
“With Brisbane’s population growth at 1.6 per cent and surrounding areas like Moreton Bay at 2.2 per cent, the Sunshine Coast at 2.7 per cent and Ipswich at 3.7 per cent, we are forecasting that Brisbane will be the standout performer over the next three to five years.”
Realestate.com.au chief economist Nerida Conisbee agreed, telling news.com.au Sydney investors especially had started to turn their attention north.
“Interest is strong in the Gold Coast across the board although there’s more action on the south side in places like Tugun and Burleigh Heads,” she said.
She added there was also a notable trend towards Tasmania, Adelaide and pockets of NSW such as Tweed Heads and Byron Bay.
Adelaide has also been flagged as finally booming after recently hitting the highest median house price ever recorded, largely driven by jobs and economic growth off the back of defence contracts, the announcement of the new Australian Space Agency and other investment in the area.
“Inner Adelaide, beachside and the Adelaide Hills tend to have the most activity but there’s also quite a lot of rental demand in low-cost suburbs so we’re expecting to see a bit more investment there in those really cheap suburbs over the next 12 months,” Conisbee said.
“There you can get houses for $250,000 so for an investor, it’s a relatively low cost in terms of outlay and the area is seeing really strong rental demand which means you’re more than likely to get tenants, so for investors it’s a really attractive area,” she said.
The Australian Prudential Regulation Authority will ease its curbs on interest-only residential mortgage lending, it announced on Wednesday.
The supervisory benchmark was put in place as a temporary measure, leading to significant declines in lending to investors and putting downward pressure on boiling house prices and Australia’s record high household debt-to-income ratio.
The proportion of new interest-only lending is now significantly below the 30 per cent threshold APRA introduced in March 2017.
APRA will remove the 30 per cent limit from 1 January 2019, with plans to conduct a review into banks’ lending practices next year.
In April, APRA removed the 10 per cent investor growth “speed limit” it had imposed in 2014.
APRA said that the removal of the caps was subject to the banks providing “certain assurances” about the strength of their lending standards.
“APRA’s lending benchmarks on investor and interest-only lending were always intended to be temporary,” APRA chairman Wayne Byres said.
“Both have now served their purpose of moderating higher risk lending and supporting a gradual strengthening of lending standards across the industry over a number of years.”
In a letter to the banks, APRA said that its curbs had reinforced sound residential mortgage lending practices and “significantly improved” the banks’ lending standards.
The result, APRA says, is more resilient banks and better overall financial system stability.
Interest-only lending still ‘higher risk’
Owner-occupier interest-only lending remains a higher risk form of lending, the regulator said.
“APRA expects that ADIs will maintain prudent internal risk limits on interest-only lending.
“These internal limits should cover both the level of new interest-only lending and the type, including lending on an interest-only basis to owner-occupiers and lending on an interest-only basis at high LVRs.”
The regulator says it plans to conduct a review of banks’ risk controls on interest-only lending in 2019 and will continue to “closely monitor” conditions in the housing market.
CBA, the nation’s largest mortgage lender, is axing residential and commercial loans for self managed super funds amid growing concerns about regulatory problems, property market weakness and stricter capital adequacy rules squeezing returns.
The bank is set to announce it is pulling SMSF lending product, SuperGear, in a bid to “become a simpler, better bank and streamline our product range”, from October 12.
But the moves will shock mortgage brokers and financial advisers and make nervous property investors more jittery about the outlook amid falling prices, rising costs and oversupply, particularly for apartments in the inner suburbs of Melbourne, Sydney and Brisbane.
It is also being done during a period of increased regulatory scrutiny of leveraged superannuation assets, potential reputational risks to lenders and advisers from “high risk” single investment SMSF schemes, and lenders’ capital adequacy requirements.
“CBA has decided to withdraw its SMSF lending product that allows SMSF trusts to purchase both residentially and commercially secured properties,” a spokesman said.
“This is part of our strategy to become a simpler, better bank. We are streamlining our product portfolio and have decided to discontinue SuperGear.”
Support existing accounts
The bank said it will be writing to customers who hold a SuperGear loan outlining the changes.
It will continue to support existing loan accounts.
“We are seeing the writing on the wall for leveraged SMSFs,” said Sally Tindall, director of research for RateCity, which monitors rates for financial service products. “This calls into question the viability of the leveraged SMSF sector.”
Regulators fear problems arising from SMSF investors leveraging their superannuation to invest in a single residential property because of the lack of diversification and increasing dangers of loss in a falling property market where it is difficult to find tenants. Systemic risk is low because the loans are non-recourse, which means they are secured by the property.
The Australian Taxation Office and Australian Securities and Investments Commission are targeting the use of SMSFs to invest in property after a review revealed 90 per cent failed to comply with “best interests” tests and other legal obligations.
It warned the strategy of gearing through an SMSF to invest in property, which is heavily promoted by property seminars and “property one-stop shops”, is risky.
The one-stop shops typically involve real restate agents, developers, mortgage brokers, accountants and financial advisers.
A key finding of the David Murray-led financial system inquiry in 2014 was that leverage should be banned in superannuation funds to mitigate the risk of financial instability. The government rejected his advice and Mr Murray said that was a mistake.
Mr Murray, who was recently appointed chairman of AMP, the nation’s largest financial conglomerate, is expected to launch an internal review of its SMSF lending practices.
Banks are also believed to be quitting the sector because of increased capital adequacy requirements by the Australian Prudential Regulation Authority are squeezing profits.
The greater complexity associated with SMSF loans and relatively small size of the market are also disincentives, according to analysts.
“As banks are looking to streamline and reduce costs, these are the types of products that get reduced,” he said.
There are fears that legal restrictions – or caps – on how much an SMSF investor can contribute to their plans could cause a credit crunch for many borrowers and force fire sales of their properties, which becomes more likely as property capital values and yields slump.
This scenario could arise if the expense of renovating a property, or supplementing rental income, exceeded annual caps.
Lenders are also lowering their lending book risks by increasing scrutiny of borrowers’ income and expenditure in assessing their capacity to repay.
Other major lenders are also tightening their SMSF lending policies in addition to increasing rates on loans and other property-related credit.
Nearly $700 billion is held in SMSF funds by more than 1 million investors. During the past four years the number of members investing in property has increased from about 3.6 per cent to 6.9 per cent of SMSF fund assets.