Why Westpac is Making it Tougher for You to Invest in Property

On Monday, Westpac CEO Brian Hartzer made an announcement about investor lending. He said Westpac will make it tougher for people to borrow money for home.

Westpac used to assess borrowers’ long term ability to pay back their loan by seeing whether they’d cope in the event that rates went up to 6.8%. To get a loan, you had to show that you could afford repayments at that rate as well as the current price. From now on, they’ll test whether applicants could afford 7.1% curiosity. Even if interest rates are reduce further, investors will have to show they can afford 7.1%.

There aren’t any estimates on how many investors this could cut out of the market. An extra 0.3% on the test doesn’t sound like much. But it can often mean the difference between a sustainable home market, and one that’s fuelled by a credit boom.

Hartzer said that ‘A stimulus to the economy through an interest rate cut has the danger of exacerbating in investor property or particular areas, the possibility of a speculative rise in housing prices [so you] try to restrict that, because nobody wants to see a housing bubble‘.

So exactly what prompted them to make this alter? It’s the Australian Prudential Regulation Expert. They’ve been talking to banks and lenders whatsoever levels. Hartzer added, ‘We’re all on the same page here. Nobody wants to fuel a speculative credit boom.’

What APRA said

The Reserve Bank associated with Australia has been worried about the housing bubble for a while. In his statement on April 7, Glenn Stevens said that ‘Dwelling prices continue to rise strongly in Sydney, though trends have been more diverse in a number of other cities. The financial institution is working with other government bodies to assess and contain dangers that may arise from the housing market‘. For several months, they’ve been dealing with APRA to see how to do this.

APRA offers told the banks that they need to cut credit growth below 10%. At the begining of December, they said that ‘portfolio growth materially above a threshold of 10 % will be an important risk sign for APRA supervisors in considering the need for further action‘. Westpac’s is currently Eleven.5%.

They gave details on how they believe lenders should do this:

‘In APRA’s view, these should incorporate mortgage loan buffer of at least 2 percent above the loan product rate, along with a floor lending rate with a minimum of 7 per cent, when assessing borrowers’ ability to service their loans. Good practice would be to maintain a buffer and floor rate comfortably above these levels.’

The 2% and the 7% figures were based on past rate rises, market forecasts, as well as international standards.

It seems that, within raising their floor rate to 7.1%, Westpac has given within.

Other banks haven’t made any kind of similar announcements yet. It is possible that Westpac were targeted by APRA. In late March, APRA chair Wayne Byres said that they were ‘targeting those that are pursuing the most aggressive financing strategies‘.

Who’s going to benefit from this?

It’s possible that some owner-occupiers will benefit. APRA said it wants to limit higher risk mortgages. This includes loans with very long conditions, and interest-only loans. But there might be fewer investors in the market because conditions get stricter. This could ease house price development.

Already have investment properties? You might want to keep an eye on the way lending problems affect prices. If you’re a risky investor, your capital increases may suffer.

Eva Mellors
Contributor, Money Morning

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