Long Property

I haven’t seen official data on this but by my estimates borrowing capacities have fallen approximately 20% over the past 18 months. The banks have tightened policies in response to APRA (the banking regulator) and the Royal Commission. The result is that finance has become significantly harder now to obtain.

So how can you prepare from a finance perspective for what lies ahead… and at what point do you consider getting back into the market?

Here are ideas from the client strategies I’m currently seeing deployed.

1. Add value to existing properties: For those in a position to renovate or develop, homeowners and property investors have the potential to manufacture their own equity without having to rely on the market to do the heavy lifting. The benefit here is that it’s often less costly to improve an asset, as opposed to buying a new one, so there’s less need for bank debt.
2. Release equity: Many clients have benefited from the recent Melbourne and Sydney price booms, therefore they are now sitting on a substantial amount of equity. We have many clients looking to release this equity now, even if they have no immediate need for the funds. A common strategy is to release equity and place all the funds into a 100% offset account linked to the loan, this way no interest is charged until the funds are actually used. Having the equity available means clients are in a strong position with respect to a future purchase, because they have ready access to the funding requirement.
3. Get pre-approved: There are certain parts of Melbourne and Sydney which are already down 10-20% from their peaks 12 months ago. It’s hard to know when any market will bottom out, but for those who are willing and able to buy, simply knowing they’re not ‘buying at the top’ is reason enough to at least get pre-approved now for finance, so when the right property comes along, they can pursue it confidently. Pre-approvals at most banks last 3-6 months in the current market, they allow clients to bid confidently at auctions, or to negotiate more effectively in any private sale arrangement.
4. Save: In the current market a lot of clients are realising that they can no longer be as frivolous with their money. Maybe they’re saving for their next deposit, or maybe they’re reducing debt to lower their loan to value ratios, which ultimately de-risks their circumstances. Others may be preparing for when their Interest Only loans revert to Principal & Interest (at which time their repayments will rise), and others may be reducing debt and/or living expenses to be viewed more favourably by the banks for an upcoming loan application. Whatever the reason, increasing savings invariably lowers risk and gives clients more options.
5. Replace bad performers: This won’t be a strategy for everyone, but with the banks constraining what people can borrow, holding onto a dud asset has an opportunity cost which is now starting to bite. You may have an asset which is not costing you much to run, but if it’s not growing in value and holding it means you can’t buy a another/better asset (because you can’t borrow more), then you may consider selling now and replacing the asset with a superior one, or at least just selling now and freeing up your borrowing capacity for another purchase at a later date.
6. Refinance: A lot of investor clients have Interest Only loans which are expiring soon. Renewing Interest Only periods was easy in the past, but now it requires a brand new, full blown, loan application. With this in mind a lot of borrowers are refinancing to different institutions to renew Interest Only periods, and at the same time they’re also securing cheaper interest rates and cash-back offers (the major banks are currently offering $1,250-2,000 to compensate clients for the hassle of refinancing). The risk of not refinancing now (while you can) is that you may not be able to refinance later, which may mean being stuck in loan products you don’t want to be in.
7. First homebuyers can consider ‘rent-vesting’: Most first homebuyers can’t afford to buy a great home in their ideal suburb, so they are instead choosing to rent a great home, and then buy an investment property elsewhere. This strategy often means the borrower can save money and/or live in a better property, because with rental income and negative gearing benefits in their favour, investors tend to come out with better cash-flow than owner occupiers. This strategy may also suit those who live in an area more prone to falling house prices, and it may also suit the younger person who doesn’t yet know what will come of their work or relationship situations. For example it wouldn’t be wise stretching yourself to buy a home to live in today, only to then realise in a year or two that you need to be elsewhere for work, or that you need a larger home for family.
8. De-crossing your securities: It used to be that one could easily sell a property and then keep the net sale proceeds, so long as their aggregate loan to value ratio was kept to 80% or below. The banks would simply leave you alone. Nowadays it’s not uncommon for the banks to perform income tests on investors when they sell investment properties, and in the situation where without the rental income from the investment property being sold the borrower can no longer demonstrate serviceability for the remaining debt, the banks are forcing the client to reduce their exposures (e.g. the banks are taking money from the sale proceeds, and insisting that these funds go towards reducing debt, rather than letting the borrower decide what to do with their money). This is still a new policy area, and all banks operate differently, but the borrowers who don’t have their debts cross collateralised tend to have more control. I’m seeing a lot of clients restructure their lending this way now, so they have maximum control and maximum flexibility when changes occur down the track.

Hopefully there are at least one or two ideas here which may be worth you exploring further. Like with anything, advance preparation will only make your eventual move smoother, and have a higher likelihood of success.