September 01, 2018
Investment rate moves and market changes.
'Set and forget' Investment loans are more or less a thing of the past with loyalty to one particular lending institution now uncommon.
This is even more so with the recent Royal Commission Enquiry. The question is how has this affected rates and the ability to borrow new money or refinance $ for $ debt to a more suitable rate and product.
Let’s discuss rates. Yes, rates have increased based on LVR (Loan to Valuation Ratios) and Interest Only repayments. No matter what the noise is around these two topics, the reason for the increase in rate goes back to the basics of Risk.
To understand risk, think of it as lending money to a stranger. You would want clients to put some of their own funds into the purchase, wouldn’t you? If they only put a small amount in you would look at the deal as riskier than someone who put 50% towards the purchase? The same applies when repaying the loan, if they are reducing the debt they owe there is a greater expectation of receiving your money back. This is the core business principal the banks are reverting back to.
How has this impacted the ability to borrow? Serviceability!
Serviceability has always been income verses expenses. This has never changed. What has changed is that people’s living expenses have increased and living on credit has been accepted as the norm due to the expectation that property prices would increase “Human nature”.
Reality is that unless someone makes us look at what we are actually spending the majority of people don’t know how much they do spend.
To protect the future value of property prices and people’s ability to live a comfortable lifestyle throughout their own life, the banks have put verification processes in place making the client and credit provider responsible and accountable for their actions.
This includes the following: servicing loans at a much higher rate than they repay (7.5% – 8.5%), evidence of how loans are going to be repaid if there is a large debt after retirement age and living expenses are verified by transaction and credit card statements.
The discussion of rate and serviceability is not new. Equity and a deposit are the two primary principals that have always needed to be satisfied when obtaining credit. Basically, what is going into the purchase and the ability to repay the loan.
Does this mean that obtaining a loan is harder, “No” it’s just different now!
It is however important to give your investment loan a thorough health check on a regular basis. My recommendation is to review every 1 to 3 years. That does not mean refinancing at every review, it is about making sure your loan is working for you rather than unnecessarily costing you money.
Whatever the investment strategy, your loan is a key component of your ticket to wealth. A pragmatic approach is necessary, along with sound advice and a clear long-term plan.
Perhaps it's time to give your investment loan a thorough health check?
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