It’s happening, the major banks are putting the breaks on new lending to property investors who are looking to get better deals. So what does this mean for those rentvesters, particularly if interest rates could rise later this year?
We know that lenders are becoming fussier on what they are prepared to lend on.
This morning’s Fairfax Media headline about Commonwealth Bank freezing loans to new investors who want to switch or refinance with the country’s biggest bank, are a sure sign of more to come.
Should interest rates rise over the next 12 to 18 months, which some economists are tipping will indeed happen, the banks know that homeowners who stretch themselves could face difficulty in servicing that debt.
What are banks looking at now?
From a lending perspective, increased rates equal higher loan servicing requirements.
When assessing a loan application, a bank will do a few things.
- 1, They will make assumptions on your cost of living.
Even if you’re declared expenses are less they will use their own numbers if it’s a higher amount.
If you have dependent children that figure gets bumped up again.
- 2, They will also calculate your ability to repay the debt at an inflated interest rate. Presently, most lenders are working on a servicing interest rate between 7 per cent and 7.5 per cent.
That’s about 3 per cent and 3.5 per cent higher than most advertised interest rates.
With interest rate rises on the cards it’s reasonable to expect lenders servicing requirements to reach 8 per cent.
Half a percent might not sound like a lot but it will significantly impact the borrowing ability of many individuals particularly with higher debt requirements.
Higher debt servicing requirements will result in lenders wanting to see higher income levels.
It’s going to get tough… but I will stop short in recommending that you get a higher paying job!
However, in this situation it has now become an income problem.
Living in the home you own is an expensive process because it doesn’t generate any income.
You are completely reliant on capital growth and most home owners completely underestimate the actual expenses involved in maintaining and running a home.
No one tends to calculate how much interest they pay, factor in unexpected maintenance costs that pop up or even determine the labour involve and mowing the grass each week!
Adopting a rentvesting strategy provides one solution to the income problem.
Choosing to rent where you prefer to live and investing in more affordable areas can create wealth and provide lifestyle benefits.
Renting yourself and purchasing an investment property means that you’re generating a new income stream, in the form of rent, which would be in addition to your salary.
In most cases lenders, will factor in 80 per cent of the rental income into their serviceability assessments. This could make the difference in obtaining a loan in the first place.
Rethinking the traditional home ownership model equates to greater flexibility because you’re not tied down to the same property for the next 25 years.
It also provides an additional income stream that can cover many the associated costs of owning property.
Rentvesting in a rising market can accelerate your ability to get on the property ladder.
Allowing you to grow an asset base with the money that you can afford.
Meaning that you don’t need to sacrifice your lifestyle to create the comfort and security that we all want in our lives.