4 practical steps to increase serviceability when investing in property

With increased scrutiny by financial authorities on lending practices, banks have tightened their requirements, impacting investors trying to secure finance for property. Here are 4 practical steps investors can take to better their serviceability.

2017 marked a year of increased scrutiny of banking lending practices by the Australian Prudential Regulations Authority (APRA), resulting in banks implementing tougher procedures for obtaining investment finance. The guidelines had a profound effect, with numerous investors in our latest investor survey indicating that securing finance is now the biggest barrier to starting or growing a portfolio.

One key factor in obtaining finance approval is serviceability: banks must minimise the risk of defaults on repayments, and therefore will calculate how able you are to service (pay back) your loan over its lifetime. They use bank-specific calculators to compare your income (job income, rental income, child support etc.) to your outgoings, which includes living costs, debt and ongoing costs.

Due to the APRA interventions over the last 2 years, banks now take a far more conservative approach in their serviceability assessment and therefore, despite being able to service a loan based on your own calculations; in a bank’s system you may not pass the serviceability test.

Here are four practical steps you can take to improve your chances of success:

Step 1 – Easy credit is a liability

Credit cards are ubiquitous among Australian families but must be taken into account when applying for finance. A bank will consider any kind of ‘easy’ credit a liability and therefore each credit card you own will be calculated as being a debt to the value of the credit card limit. That means if you have 2 credit cards with a limit of $10,000AUD each, the bank will consider you to have a debt of $20,000AUD and calculate a percentage of that amount as ongoing expenditure. Paying off your credit card on time or not using your credit card at all will have no impact on the bank’s calculations.

An easy step to increase your serviceability is to cancel any credit cards you don’t use, and possibly lower the limit on the ones you do use. Make sure you pay off the credit cards you do decide to keep on time. Accumulating debt on your credit card will affect the bank’s assessment of your creditworthiness.

Step 2 – Keep a record of your income

This is particularly important for those who are self-employed: keep your financial records up to date so you can prove your actual take home pay. If your business has become more profitable and income has improved over the past months, you should be able to adequately demonstrate this or the bank will use your previously lower income in their calculations.

Step 3 – Pay down debt and decrease ongoing costs

Phone plans, subscriptions and ongoing costs will all be added to your monthly expenditure, each in turn slightly lowering the amount the bank will lend you. Non-deductible debts, such as car loans, will also weigh against you.

Check that you really need that new phone on the more expensive plan, and close off any recurring payments for services you no longer need. Pay down as much of your debts as possible. Potentially consolidating short term debt into longer term debt can help to lower your repayments which in turn helps your serviceability.

Step 4 – Get professional help

With the banking environment in constant flux in the last 24 months, it is now more important than ever to work with a specialised investment broker, who has the knowledge not only of the lending landscape but also understands your unique situation and requirements. They can help you find the right product and assist with any further questions you may have on how to increase your serviceability.

If you would like to know more about how the 2017 APRA changes may affect you or how serviceability tests have changed, we recommend you watch our FREE on-demand webinar titled “APRA crackdown – navigating the changes to lending”.

What is a retail investor?

Property syndicates, investment types that utilise pooled funds to purchase or develop property, are generally offered to two types of investors, either wholesale or retail. These types of investment opportunities are less commonly open to retail clients as the law necessitates more onerous compliance requirements for funds dealing with these investors.

The intent of the distinction is to protect individuals who don’t meet the wholesale investor requirements and may not have the financial flexibility or capacity to take on higher risk investments. In essence, all investors are retail investors unless they meet the wholesale investor criteria, in which case they would have greater access to a wider range and sometimes more complex financial products.

The notable differences for retail investors can include:

Paperwork requirements

Retail investors must be provided with a Product Disclosure Statement (PDS) that includes material on the product’s key features, fees, commissions, benefits, risks and complaints handling procedures, something a wholesale investor might choose to forgo in favour of a more simplistic Information Memorandum.

Greater investor protection

The Future of Financial Advice (FOFA) legislation is intended to improve the confidence and trust of Australian retail investors in the financial services industry, providing protection from poor financial advice and ensuring the availability, accessibility and affordability of high quality financial advisors. Wholesale investors have less protection in these areas.

Increased governance requirements

The Australian Securities & Investments Commission (ASIC) requires funds open to retail investors to meet increased governance requirements, including an approved constitution and compliance plan, an authorisation for licensee on the investment type, a mandated net tangible assets requirement, external board of directors, annual audited accounts to be lodged with ASIC and custody requirements. Wholesale investor funds are permitted to vary these requirements as part of the trust deed

The increased legislation alone can add a bureaucratic and economic cost to investment types such as property syndicates open to retail investors. However, property syndicates that are able to meet the legislative requirements for retail investors can still provide the benefits of a pooled investment asset that is generally lower-risk (compared to wholesale investment opportunities) to clients that meet this profile.

If you wish to learn more about property syndicates and pooled investments, our sister company Mair Property Funds has published an excellent guide to getting started in commercial property through property syndicates.

Please note: the information in this article pertains to General Advice only. Momentum Wealth and its affiliated entities are not solicitors, accountants or financial planners. While all information is provided in good faith, you should seek your own independent legal, accounting and financial advice in relation to any transaction you undertake.

Perth property market begins recovery in December quarter: REIWA

REIWA December quarter data in the key categories of median price, sales activity, listing levels and average selling days were all good news.

The Perth property market ended 2017 on a positive note, according to the latest data from the REIWA.

December quarter data showed improvements in the key categories of median prices, sales activity, listing levels and average selling days.

REIWA President Hayden Groves said it boded well for Perth that all key indicators had improved over the quarter.

“The Perth market found its floor and stabilised in the back half of 2017. We now appear to be entering a recovery phase, though REIWA remains cautious about expectations of rapid growth in the next 12 months,” he said.

Median house and unit price

Perth’s preliminary median house price increased 1.2 per cent to $516,000 in the December quarter 2017.

“Once all sales have settled, we expect the final December quarter median to lift to $520,000, which is a notable improvement on the September quarter median of $510,000.

“On an annual basis, the Perth market is very stable. We’ve observed consistent price levels between the December 2016 and 2017 quarters which is a strong signifier the market has turned a corner,” Groves said.

Perth’s median unit price is $405,000 for the December 2017 quarter which is a 1.3 per cent increase on the September quarter.

“It’s encouraging to see Perth’s house and unit medians increase over the quarter because it suggests one sector hasn’t recovered at the expense of the other,” Groves said.

Sales activity

There were 4,946 dwelling sales in Perth in the December quarter.

Mr Groves said this figure was expected to lift to 6,700 once all sales had settled, putting it significantly above the September quarter sales figure.

“Traditionally, the September quarter outperforms the December quarter, but that wasn’t the case in 2017. The December quarter is on track to record 14 per cent more sales than the September quarter,” Mr Groves said.

REIWA analysis shows the composition of sales shifted in the December quarter in Perth, with more transactions occurring above $700,000.

“We’ve observed a surge of activity in Perth’s aspirational suburbs, with buyers recognising there is good opportunity to secure a home in these areas which might have previously been considered unattainable by many,” Mr Groves said.

“This spike in sales above $700,000 has also contributed to Perth’s median house price increasing over the quarter.”

Listings for sale

There were 13,088 properties for sale in Perth at the end of the December quarter.

Mr Groves said this was on par with the September quarter figure and six per cent less than the December 2016 quarter figure.

“There were 800 fewer listings in Perth at the end of 2017 than there was in 2016 and some 1,300 less than there were at the same time 2015. We have consistently seen stock levels decline over the last two years as the market trends towards parity,” Mr Groves said.

“Declining listing levels combined with notable improvements in sales activity has helped restore net- demand. With buyer activity increasing, stock levels are being absorbed faster,” Mr Groves said.

Average selling days

It was 10 days faster to sell in the December quarter than it was in the September quarter, with it taking on average 60 days to secure a sale.

“It’s been two years since it was this quick to sell in Perth. The combination of sellers’ preparedness to meet the market and buyer appetite for well-priced property has significantly shortened days-on-market,” Mr Groves said.

As Sydney fades, Perth shows early signs of recovery: Hotspotting’s Terry Ryder

Generalised commentary masquerading as analysis is the curse of the real estate consumer.

Much of what appears in mainstream media about residential real estate discusses Australia as a single market. That’s an early clue for consumers that the commentator has shallow knowledge.

If you’re reading something from an alleged expert and they’re talking about what’s happening with “the Australian property market” or forecasting trends with “Australian housing prices”, turn the page because you’ve tuned into a charlatan.

Too much has been written about “the Australian property boom” and “the national affordability crisis”.

A core problem is that so much of the commentary comes out of the Sydney and the situation in our biggest city dominates the thinking and attitudes of commentators. We have outcry about a national problem that generally does not exist and “solutions” that will slug the whole nation to fix issues isolated to a small section of the national geography.

The 20 million Australians who don’t live in Sydney must wonder what the fuss is about. Any resident of Perth, Adelaide or Darwin would be bemused by the ongoing debate about soaring prices, affordability catastrophes and the need for major national action.

Many of the worst culprits for generalised and usually misinformed commentary are based overseas. Often they’re major international organisations or ratings agencies which seek to manufacture publicity by making dire warnings about Australian real estate based on generalised national statistics pumped up by the strength of the Sydney market.

There are plenty of local pontificators making the same mistake, most of them economists who should never be consulted for comment on residential real estate, a subject that’s not within their area of expertise, if indeed they have one.

Anyone who thinks Australian has had a national property boom recently should compare the price growth statistics for the capital cities in 2016 with the results in 2002 and 2003.

Back in 2002/2003, the last time we had a genuine nationwide boom, every capital city had sharply rising prices. In 2003, according to the ABS, house prices grew at least 13 percent in every one of the eight capital cities, including four where prices rose by more than 20 percent.

The ABS figures for last year have a very different look about them. Only Melbourne and Sydney managed double-digit growth and only just. Two cities, Perth and Darwin, recorded falling prices, while Brisbane, Canberra and Adelaide managed only moderate (4 or 5 percent) rises. Hobart rose 8 percent, according to these numbers.

When you compare this with that genuine boom at the start of the century, it’s apparent that even Sydney’s growth was tame compared with back then. Melbourne, meanwhile, has mostly been below 10 percent with its annual house price growth in the past four years, only recently bursting out into double digits (and now leads the nation, according to most sources).

Now the growing chorus among the generalised pontificators is that “the Australian property boom is over”.

If they’re talking about Sydney, they’re probably right. But out there in the heartland beyond the biggest cities, different things are happening, including places where markets are rising, even as Sydney is subsiding.

They include regional New South Wales, which now has far more rising markets than Sydney does.

The same is true of regional Queensland, which has many ascendant markets (as well as a few that you might still want to avoid), much more so than Brisbane at the moment.

Melbourne is less advanced than Sydney in its growth cycle, so has more time to run with price growth than Sydney does.

Both Hobart and Canberra have sparked to life recently on the back of improving local economies and are likely to continue heading in the opposite direction to Sydney.

Adelaide’s market is quite busy but is unlikely to deliver strong price growth, other than in selected pockets, because it lacks the economic and population growth impetus of other major cities.

Perth has been going backwards throughout the four years that Sydney has been advancing – and now, as Sydney fades, Perth is showing the early signs of recovery.

New report shows housing affordability continues to improve in WA

The Real Estate Institute of Australia (REIA), with support from Adelaide Bank, recently released a Housing Affordability Report which found Western Australia to be the most affordable state in the country for tenants and homebuyers.

Only the Northern Territory and Australian Capital Territory were more affordable.

The Housing Affordability Report showed buyers and tenants were in a fortunate position in WA, with affordability in the state’s housing and rental markets improving in the September quarter 2017 on both a quarterly and annual basis.

It found that in the WA housing market, the proportion of family income required to meet home loan repayments decreased from 23.8 per cent in the September quarter 2016 to 22.4 per cent in the September quarter 2017, despite wage growth remaining stagnant.

In the rental market WA tenants were also paying less, with the proportion of family income required to pay rent decreasing from 19.2 per cent in the September quarter 2016 to 17.4 per cent in the September quarter 2017.

This decline officially makes WA rent prices the most affordable in the country.

Another positive highlighted in the report is that the number of first homebuyers in WA increased by 7.4 per cent over the quarter and 17.9 per cent when compared to the same time in 2016.

Additionally, the average loan to first homebuyers in the September quarter 2017 was $330,074, which is a decrease of 0.9 per cent over the quarter and 4.4 per cent less when compared to the September quarter 2016.

Whilst the Perth property market is showing signs of recovery, buyers and tenants remain well favoured by the current market, with a good supply of housing and rental stock to choose from and, as showcased on

www.reiwa.com, at the more affordable end of the market.

Nationally, affordability improved overall across Australia as red-hot markets in Sydney and Melbourne cool, although in New South Wales homeowners still pay an average of 36.1 per cent of their family income on home loan repayments – significantly more than Western Australians do.

While the dream of homeownership remains a challenge on the east coast, it is very much alive and well in WA.

With our local market on the cusp of recovering, now is the time for buyers to take advantage of favourable conditions to secure their home before our local WA market becomes less affordable.