One of the biggest effects of the RBA’s year of rate hikes has been a significant reduction on borrowing power for everyone.
Owner-occupiers have had to face up to being eligible to borrow up to 30% less than this time last year in some cases. Imagine looking for properties with a million-dollar budget in April 2022, then deciding to put plans on hold for whatever reason, only to come out this year and find your budget is now $700,000. It’s a massive difference, especially when you consider prices have fallen only a fraction as far as borrowing power and they are already on the way back up towards full recovery.
Even harder for investors
Property investors already have the rough end of the pineapple when compared to owner-occupiers. They pay higher interest rates, are always targeted in measures designed to slow the market and are overlooked for the grants and benefits enjoyed by the first homebuyers they compete against at the affordable end of the market…even though investors provide necessary housing for tenants.
You may have found a great deal on a property and know that despite all the challenges you’ll be able to service the loan easily, but when you go to the bank, the “computer says no” and you get stuck.
One thing that the team at Zinger Finance are encountering more and more is clients stuck in ‘mortgage prison’. Basically, this means that they are unable to refinance to a better deal or to release more equity because they no longer pass the servicing test.
When interest rates were at historic lows, the APRA stress test decreed that borrowers must be assessed at a rate 3% higher than what they would be paying on a loan, in order to be approved by a lender. This buffer made sense when we consider the sharp rate rises that ended up taking place.
However, that 3% buffer remains in place now, meaning investors wanting to borrow at 6% plus interest rates are now being assessed for servicing at 9-10%. Investors who are already paying 7% on an existing loan are unable to refinance to one in which they’d be paying less each month, because they can’t satisfy the lender that they could handle another 3% of rate hikes.
One advantage that investors have over owner-occupiers is they don’t need to live where they buy. So if the best investment deals are 700km away, it’s all good. You don’t have to pack up and move, you just need to ring around to find a good property manager in the area you buy.
You can purchase in a cheaper market than you otherwise would have, in line with your new reduced borrowing power. The bank will be happier with less money at stake and therefore less risk, while hopefully a greater likelihood of positive cash flow.
You should always aim to give the bank what they need so that they lend you the money that you need. If your strategy is to buy multiple properties, for example, the bank will require that you have income, that you have a deposit and that you can afford the deal.
For that, you need cash flow in the form of great returns. If you buy a property for $700,000 and it rents for $500 a week, will that allow you to buy the next one? How about a third one, a fifth, or more? Nope. You will need better cash flow to boost your servicing.
Then there’s equity to help fund your next deposit. The $700,000 property may make you $50,000 in equity pretty quickly, which sounds good. But say that instead of that property you bought three properties at $200,000 each and got $50,000 equity on each of them. Then you’d have a total of $150,000 in equity from an outlay of $100,000 less, which will free you up to target a faster expansion of your portfolio.
Start with the experts
If you’ve read this and realised your strategy isn’t up to scratch or that you’re already stuck, the first thing to do is to reach out to Zinger Finance.
Our brokers can help unpack a sticky situation and arm you with the knowledge you need to then come up with a new strategy and get back on track.