Banks move to help residential property investors borrow more
It is getting easier for residential property investors to borrow, with NAB the first of the big four banks to increase the proportion of rent that can be used to qualify for a loan or seek a bigger loan.
Benn Cizauskas, 41, is among many investors whose borrowing capacity has been squeezed – from about $850,000 to about $500,000 – by seven months of successive rate rises.
Benn Cizauskas, photographed with his daughter Hannah, is building an investment portfolio of four properties to boost his retirement savings. Pete Wallis
The value of borrowing by investors around the country has slumped by about 25 per cent since interest rates started rising in May, having peaked at a record high of nearly $12 billion two months earlier, according to analysis by CoreLogic, which monitors property markets.
NAB is increasing the proportion of rental income used to calculate a borrower’s capacity to service a loan from about 80 per cent to 90 per cent. “With vacancy rates at record lows across most regions of Australia, it is not surprising to see lenders focusing more on this sector of the market,” said Tim Lawless, research director of CoreLogic, which monitors property markets.
Other lenders say they are “equally interested” in both investors and owner occupiers. ANZ is offering a $4000 cashback for investors seeking to refinance their loans.
Lenders typically accept 80 per cent of gross rental income along with other income, such as a salary, to calculate borrowing capacity. They assume the balance of rent will be used to pay for managing agent fees, council rates, strata levies, repairs and cash needed to cover for periods when the property is vacant.
Chris Foster-Ramsay, principal of Foster Ramsay Finance, said: “Other banks will follow easing lending terms because the case for property investing stacks up. There’s not enough housing stock in the pipeline to meet the increasing demand.”
Cizauskas, an information technology consultant, is building an investment portfolio of four properties to boost his retirement savings with the possibility of retiring at 55. He is encouraged by the easing of lending terms to help complete his portfolio.
In the past 12 months he has purchased a townhouse, a villa and a freestanding house in the suburbs of Brisbane and is looking to buy another property. His home is financed by Loans.com and rental properties are principal and interest loans with CBA, the nation’s largest lender.
“I’m confident about the long-term outlook for property and don’t care about the current downturn at all,” Cizauskas said. “I’m looking for long-term capital growth so that in 14 years I have the option not to work.”
Each of Cizauskas’ properties is negatively geared, which means any net rental loss during the financial year may be offset against other income.
“Rental demand is extremely strong and I’ve been able to increase rents every time the lease comes up,” he said.
Rents for Sydney homes have rocketed by more than 28 per cent during the past 12 months, according to SQM Research.
Melbourne rents are up by 25 per cent while Perth and Adelaide are up about 20 per cent, the analysis shows.
Rents for student accommodation are already 10 per cent above pre-pandemic levels and likely to keep rising into the 2023 academic year, according to Scape Student Living, a student rental specialist.
Investor mortgage rates, which have more than doubled since May when the Reserve Bank of Australia started lifting cash rates, are expected to continue rising after this month’s 0.25 percentage point increase to 2.85 per cent.
Both Westpac and ANZ believe cash rates will peak at 3.85 per cent next May. CBA predicts a peak of 3.1 per cent and NAB 3.6 per cent.
The accompanying tables from RateCity, which monitors loans, show the lowest rates for investors paying interest-only or principal and interest for a $1 million fixed or variable rate loan with a 20 per cent deposit.
Melbourne-based buyers agent Cate Bakos said investors “are not getting any special treatment” from lenders.
“Investors’ assessment and interest rates are tougher than owner-occupiers. Their challenges getting a loan will be amplified if they have any other debt, such as a home or car loan,” Bakos said.
Investor borrowing has fallen the most in Sydney, down 26 per cent since May. Queensland is down by 23 per cent and Victoria has dropped 20 per cent, CoreLogic found.
“The falls came shortly after a peak in Sydney and Melbourne housing values, highlighting that investors tend to be more motivated by prospects for capital gain than other factors, such as rising yields,” CoreLogic’s Lawless said.
“The drop in investment activity is bad news for rental markets, with less investment activity implying a slowdown in rental supply at a time when more rental supply is desperately needed,” he said.
Buyers agents claim investors remain cautious after steep property price falls and the likelihood of more rate increases.
“There’s a lot of tyre kicking going on,” said Patrick Bright, a Sydney-based buyers agent. “Many investors believe most of the big rate rises are behind us. But they want to wait until they think prices have hit the bottom and there is no strong indication that it has.”
In Adelaide, where prices were lower than major eastern seaboard capitals, demand continued to be strong, said Adam Hindmarch, director of Prospa Property Advisory.
“There are not as many aggressive offers as there were two or three months ago. Demand will soften as prices fall. But the long-term outlook is robust because rental vacancy rates are low.”
Kate Hill of Sydney-based Adviseable Property said: “Experienced investors are seeing the opportunities.”
An increasing flow of skilled immigrants, the return of overseas students and locals returning to major cities after COVID-19 lockdowns are driving double-digit growth in rents as vacancies fall to record lows of about 1 per cent.
But landlord groups, such as the Australian Landlords Association, claim onerous state government regulations and taxes are worsening shortages by forcing landlords to sell or repurpose rental properties.