Market changes, interest only lending and how to benefit from softer conditions
Recent data from CoreLogic appears to show that the property markets in Sydney and Melbourne are on the slide.
But do a few rounds of data constitute a property “slide”? Or are the markets just taking a well-earned break?
According to CoreLogic head of research Tim Lawless, Australia’s capital cities saw a cooling of housing market conditions over the seasonally weak month of May with its hedonic home value index reporting a -1.1 per cent fall in dwelling values across the combined capitals.
The month-on-month fall was largely the result of declines in Sydney and Melbourne, where dwelling values have recorded significant gains over the current growth cycle to date, according to CoreLogic.
The results followed softer conditions reported in April as well.
On the ground
Even though prices seemed to be softening, what is happening on the ground in the land of property loans?
We’ve got principal and interest rates going down for owner-occupiers and investors by between 0.05 to 0.1 percentage point.
Interest-only loans, on the other hand, are going up between 0.3 and 0.45 percentage points.
The differential now between a principal and interest home loan and an interest-only one is between 1 and 1.5 percentage points.
About 25 years ago, there were differentials between homeowner and investor loans because banks had to hold more capital for investment loans.
After deregulation, however, competition drove rates to the same level and the only difference was a small margin on lines of credit.
Now a line of credit is about 1.5 percentage more expensive than a principal and interest loan.
All of these rate hikes, of course, are because of the directive from APRA that banks have to reduce their investor lending as well as interest-only loans. These directives are that banks cannot exceed 10% year on year investor lending growth and the latest measure is that lenders are now being forced to restrict interest only lending to 30% of their application volumes. It’s the 2nd measure that is now having an impact on the markets.
And, guess what? These rate adjustments are having an impact on the market. For many people, the great disincentive to invest will be interest rates and so these changes are having an immediate impact on consumer sentimentality.
Lenders are now picking targets such as lending greater than 80% LVR is no longer eligible for interest only, you just have to pay principal and interest. This has also affected a lot of our expats, with many lenders now insisting that they P & I also.
And don’t be surprised if the next measure is that home loans will all have to pay on a principal and interest basis if the above measures don’t reduce the interest only loans back to within APRA’s target range.
How to benefit from a softer market
Just because the market is softening, it doesn’t mean that investors should be fearful.
In fact, sophisticated investors should be making the most of the current market conditions.
And this includes seeking out specialists such as Intuitive Finance to assist as we continue to set new settlement records month on month and continue to be attracting more serious investors who need this specialist advice.
That’s because serious investors are looking for people they can trust and who know what they’re doing.
I’ve also been in the finance game for a number of cycles and know that this period will too pass. In fact, it’s in these times that can sometimes lead to the greatest opportunities!
Don’t let the current market conditions or lending landscape stop you from moving on with your investing journey.
Even though markets in some areas might show some softening, it’s still a good time to invest.
And if you qualify for a principal and interest loan for an investment property, that would still be better than doing nothing at all, wouldn’t it? We have to remove our fixation with interest only irrespective of the reasons and benefits for doing so or be willing to pay more for it, this is just the sign of the times.
It’s still the right time to invest so don’t let alarmist reporting, for example, get in the way of your property investment journey.
There are fewer people in the market at present, which means that the market is swinging back in favour of discerning buyers.
Remember, it’s time in the market and not timing that’s the most important element of successful property investment.
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The information provided in this article is general in nature and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information you should consider the appropriateness of the information with regard to your objectives, financial situation and needs.