Month: December 2021

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New home loan rules are here: What you need to know

From 1 November, banks must ensure that new home loan applicants would be able to repay their mortgage at a new rate – so what will this actually mean for would-be buyers?

Australian Prudential Regulation Authority’s (APRA) recent rule change has placed the new “stress test” for home loan applicants at 3 per cent – from the previous 2.5 per cent buffer.

What this means is that banks must consider whether would-be borrowers will still be able to afford repayments on a loan 3 percentage points above current rates.

APRA has stated that this would reduce people’s maximum borrowing capacity by approximately 5 per cent.

According to RateCity, the big four banks (CBA, ANZ, Westpac and NAB) have stated that loans with unconditional approval that have not yet settled will still be processed using the old 2.5 per cent serviceability test. 

They’ve also indicated that they will continue to assess customers with pre-approval who have not yet bought a property using the old stress test, provided they buy and make a full loan application within 90 days (in the case of CBA, Westpac and NAB) and 120 days for ANZ.

But, RateCity has warned customers to “be on the safe side”, urging them to inquire with their bank before making an offer on a home, particularly if their circumstances have changed.

RateCity research director Sally Tindall has advised that “anyone intending to bid at an auction in the next few months should call their bank to double-check how much they can borrow”.

“While the big banks have all said they’ll honour pre-approvals, if your circumstances have changed, you might have to start from scratch under the new rules,” she noted.

“The last thing you want your new home loan to do is to fall short.

“While buyers who aren’t borrowing at or near capacity are unlikely to be deterred, this new change could be the last straw for some first home buyers trying to stretch themselves to get into the market,” she warned.

Analysis from RateCity has revealed that a family of four with an annual household income of $150,000 could see their maximum home loan borrowing power decrease by approximately $46,490.

For a family of four with an annual household income of $250,000, their maximum home loan borrowing power could decrease by $82,400.

For a single person earning $100,000, the maximum they can borrow could drop by an estimated $34,900 under the new increased mortgage stress test.

For a single person earning $200,000, the maximum they can borrow could drop by an estimated $67,100 under the new increased mortgage stress test.

The above calculations are based on CBA’s serviceability calculator for a borrower taking out a fixed-rate owner-occupier loan, paying principal and interest with a revert rate of 3.85 per cent.

So, why has APRA changed the rate?

APRA’s increase of the serviceability buffer to 3 per cent comes as affordability becomes a rising issue, especially in the face of forecast RBA rate hikes in future years.

Home loan affordability is already at its lowest since 2016 – and that’s even with record-low interest rates. 

RateCity has outlined that the buffer increase is a bid to make sure people can meet their repayments when rates do rise.

“Although the new higher mortgage stress test may seem frustrating for some people, this move is designed to protect borrowers when rates will undoubtedly rise,” Ms Tindall offered.  

“APRA considers loans with a debt-to-income ratio of six or higher to be risky, and already, 21.9 per cent of new loans hit this benchmark in the June 2021 quarter.

She has acknowledged that if debt-to-income levels keep rising, “we’re likely to see APRA intervene with additional restrictions before the year is out”.

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Four savvy ways to supercharge commercial investing returns

One of the strongest benefits of investing in commercial property is the ability to add value to the property to increase its worth.

This aspect alone is what makes commercial so lucrative and sets it apart from its low-yielding counterpart, residential.

If you’re looking to maximise your commercial property returns, here’s four key things to consider:

Rent Increases

One way to slowly build capital in a commercial property is to simply allow the rent to increase over time. If you are negotiating the lease yourself, this could be an opportunity to add value at a faster rate.

Most leases have an annual scheduled increase built into them and as the rent grows, so does your commercial property’s value. There are a few options for annual rent reviews. You can set them to coincide with the CPI (Consumer Price Index), which is the most common approach.

A fixed percentage increase is the other main option, with 3 per cent the most common increase; 4 per cent is considered a big increase and anything above that is recognised as very high. Most tenants would find a 4+ per cent increase unsustainable for their cost base.

It’s worth noting that different markets have different rules, but most use the CPI or 3 per cent. What this means for your return on investment is that with each annual price increase you’ll see more cash coming in each month.

Also, when you revalue the property, the higher the rent the more equity you may be able to release.

Lease terms

Another way to add value is to increase the security level on your property.

The longer the lease, the greater the security. This was the first value-add we personally made to our first commercial property, a supermarket.

We were able to increase the lease from 12 months to five years. This increased the valuation as soon as the lease was confirmed.

Rent Adjustments

Part of making a deal great is often a value-add opportunity. One of the easiest methods of adding capital value to your commercial property is by increasing the rent, as values of commercial properties are largely driven by rental returns or the potential for capital growth.

To determine if there is an opportunity to add capital value through rental increases, you need to understand what the going square metre rate is for similar properties in the area.

If the tenant is paying $180/sqm and every other similar property in the area is renting for at least $210/sqm, there is a potential to raise the rent by $30/sqm.

This would represent a 16.67 per cent increase in the rental value. If you purchased it at the old rental income, then your value of the asset could also increase by 16.67 per cent.

The first step is to negotiate the rental rate when you can legally do so. For example, if the lease has three years left to run, there isn’t much you can do.

However, if you are within 12 months of lease expiration, there may be an opportunity to negotiate with the tenant early on, especially if they love the property and want to stay.

Showing the tenant a spreadsheet with all the other square metre rates in the area can be a good way of enlightening them and helping to justify a rental increase.

This is a great strategy to use when the tenant is paying below-market rates. It also takes some of the emotion out of the negotiations.

You can easily research comparable properties for lease online (using sites such as CoreLogic) to see how the property you’re interested in stacks up.

Buying under market value

We have found time and time again that it is possible to purchase properties below their true market value.

This can be done by purchasing an asset off-market without the normal competition from other buyers in the market.

Or it can be done by purchasing an asset that has a little short term risk on it that devalues the asset.

This could include a very short lease or some urgently needed maintenance. Both these cases would turn off certain buyers that can allow you to purchase a better deal.

Once you fix the maintenance issues or address the short lease, your value of the asset will rise to what the market value should reflect.