Loan crunch hits property

Investors are not only battling a drop in prices but tighter lending rules and tax changes, writes Anthony Keane

PROPERTY investors wanting to expand their holdings are finding doors slamming in their faces as tough new lending restrictions bite hard.

Harsher income tests, tighter rules for interest-only loans, tax changes and tougher assessments of rents and repayments have put the brakes on, and more squeezing is likely.

Almost one-third of the nation’s 2.1 million residential real estate investors own more than one property, Australian Taxation Office data shows, and many see it as their ticket to retirement wealth instead of the struggling share market.

However, expanding beyond one property has become much tougher this year due to:

INVESTORS’

• ability to repay now being based on interest rates between 7.25 and 8 per cent, rather than the 4 per cent many are currently charged. • only counting 70 per cent of a property’s rental income. • loans – popular among investors – being harder to come by and harder to continue, resulting in higher repayments when they switch to principal-and-interest.

The result is that potential investment loans are assessed as unaffordable even if the investor has no problems

LENDERS INTEREST-ONLY

paying it back. Financia managing director Angelo Benedetti said many investors focused on the initial lower cost of interest-only loans, without realising that the total debt still had to be repaid over a 25 or 30-year loan term.

“A lot of people have the traditional Aussie attitude of ‘we will worry about it tomorrow, not today’,” he said.

Mr Benedetti said he expected tighter rules – in areas such as measuring living expenses – to come into force next year. “From what we are hearing there’s going to be some more changes coming in February,” he said.

Investors also face potential tax hits from the Labor Party, which wants to weaken capital gains tax benefits and limit negative gearing tax deductions if it wins next year’s election.

People’s Choice Credit Union spokesman Stuart Symons said lenders were looking at how people could afford repayments once their interest-only periods expired.

“Investors need to understand that the ground has shifted,” he said.

“Given the cases highlighted by the royal commission, borrowers can expect more change and more checks on lending.”

However, Savvy Finance chief executive Bill Tsouvalas said he could see the finance market getting easier for property investors next year after regulator APRA softened some of its rules this year.

“Borrowing money in general at the moment is quite tough for all borrowers,” he said.

Mr Tsouvalas said property investors seeking finance should try to save as large a deposit as possible.