Mercia | Taxation, Business & Finance Advisers

Lenders clamp down on investor loans

Property investors across Australia are facing tougher lending tests as the nation’s banking regulator moves to moves to rein in the booming Sydney market.

The Sydney property market had a strong start to 2015 as annualised house-price growth rebounded in the March quarter.

While extremely high, Sydney’s annualised growth rate of 12.4% in late 2014 had actually been slowing before increasing again to 13.9% at the end of the recent March quarter.

The rebound in annualised growth rates in Sydney can partly be attributed to the Reserve Bank of Australia’s (RBA) decision to cut the official cash rate to 2.25% in February.

Another cut, which was announced in May and reduced rates to just 2%, is likely to continue to spur property investor appetite, particularly in Sydney where there has been a large amount of investor activity.

Conscious of reining in an overheated property market, the finance lending regulator, the Australian Prudential Regulation Authority, has required that lenders apply tougher lending standards, specifically for investors.

This will apply across the board for all Australian property investors. Even if you’re a property investor living in Perth and wanting to purchase an investment property in Perth, you’ll still have to meet these stricter lending standards.

So what do these stricter standards include?

Most lenders have begun utilising more conservative figures when evaluating loan and refinancing applications, which in turn have reduced the borrowing capacity of some investors.

Lenders are also increasing their buffers, which test how applicants would cope with repayments when interest rates rise.

Some lenders have increased these buffers from about 180 basis points (1.8%) to 200 basis points (2%) or more.

For example, an investor applying for a loan with an interest rate of 5% would now have to prove they could make repayments if interest rates increase to 7%, rather than 6.8%.

Finally, lenders have also withdrawn discount offers and incentives for investor loans and are applying much more stringent loan-to-value ratios (LVR).

Bankwest, for example, has changed its LVR for investor loans from as much as 98% to just 80%, which means investors will require far bigger cash deposits or equity interests in their existing properties.

Because of these tougher lending standards, it’s important for property investors to engage mortgage brokers who specialise in investment finance to ensure finance and investment options are optimised.

5 reasons to buy an investment property in Perth in 2015

The current conditions in the Perth property market represent an opportune time for investors to start or build their portfolios.

Although Perth house prices are widely tipped to remain steady for the next 12 months, investors should take stock and capitalise on the softer market conditions.

Here are four reasons why it’s a good time to buy an investment property in Perth.

• Record-low interest rates mean investors can access extremely cheap finance to purchase property.

• Stock levels have risen by one-third over the past year to about 13,600 at the end of March, which provides buyers with a much wider range of choice.

• Those who decide to buy property in the softer conditions will encounter less competition as many investors will choose to delay purchases until market conditions improve.

• More ‘bang-for-buck’ as less competition means buyers can ‘upgrade’ and purchase larger properties or secure properties for less. The average vendor discount for houses has increased to more than 6% as of March.

• More control over contract negotiations as less competition allows buyers to weigh contract clauses in their favour.

Investors who take advantage of these favourable conditions and invest wisely in the next 12 months will be best placed to reap the rewards for the next upswing in the property market.

Established suburb with youthful population undertakes transformation

This well-established suburb with a young population is transforming into an active social hub.

Queens Park, sitting within the City of Cannington and just 11 kilometres from Perth CBD, has a population at 5,380 with a median age of 30 years.

The area encompasses Maniana Park and has well-established infrastructure including Queens Park Recreation Centre, sports grounds, Queens Village and schooling options.

Its neighbouring suburbs include Cannington and Welshpool.

The suburb has good accessibility to Welshpool Road, Seven Oaks Street, Railways Parade and Roe Highway, as well as buses down urban corridors and easy access to two main train stations – Cannington and Queens Park.

With 73.5% of dwellings listed as houses, the suburb is mostly low/medium density.

Queens Park is currently in a transformation stage as many of the medium-density lots are being developed into grouped dwellings.

Assisting this development is the recently drafted structure plan, which will help guide future developments within the area and improve streetscapes.

The structure plan for Carousel Shopping Centre, and the surrounding residential area, has outlined plans to develop additional amenities and increase housing densities to create a new Cannington City Centre, which will ultimately be a vibrant mixed-use hub.

School facilities include St Norbet College, Queens Park Primary School, St Joseph’s School and Gibbs Street Primary School.

Responsibilities beyond the walls

While the division of responsibilities between landlord and tenant for all ‘dwelling-related matters’ are commonly known, what about those of the land?

Gardens typically aren’t at the top of a tenant’s priority list when searching for a rental property.

Subsequently, if a tenant leases a house with a high-maintenance garden, the ongoing upkeep and care may fall by the wayside.

Given this, it’s important that all parties hold a comprehensive understanding of their responsibilities regarding garden maintenance – any good property manager will ensure this is the case.

Generally, unless the tenancy agreement states differently, tenants are responsible for the maintenance of lawn including mowing, edging, watering, weeding, and fertilising.

This is also the case for garden beds and bushes and shrubs, which are to be pruned by the tenant.

These tasks fall under the ‘general maintenance’ responsibilities, which usually require the tenant to ensure the garden is maintained to a standard set at the start of the tenancy.

On the other hand, landlords are generally responsible for providing some equipment, such as hoses and sprinklers.

In some tenancy agreements, though, it’s the responsibility of the tenant to replace broken sprinkler heads.

Landlords also typically need to maintain reticulation systems, clean gutters and lop overgrown trees.

While landlords are generally responsible for keeping gutters clean, it’s the tenant’s responsibility to advise the property manager of any potential blockages or water leaks.

If the tenant doesn’t report an obvious issue, they may be liable for any damages.

Given the divide of responsibilities, it can be easy for confusion or misunderstandings to occur, which is why landlords and tenants need to be aware of their garden-maintenance duties from the beginning.

Renovating to add equity to your investment property

Renovating can be a great way to increase equity in your investment properties – it can even help you achieve your next property purchase sooner.

Property investors primarily choose to renovate for two main reasons.

Firstly, so they can demand higher rent from tenants, or remain competitive within the market.

Secondly, to increase the value of their property – from which point they can use the added equity to purchase their next investment property sooner.

Utilising the right renovation strategies and techniques can help investors achieve great success.

Even in flat real estate markets when capital growth is sluggish, renovations can be a fast and cost-effective way to increase the value of your investment properties.

However, the wrong strategy can lead to budget blowouts or poor returns, which can be highly costly.

When renovating, investors must ensure any changes they make to a property are appropriate and fit the surrounding neighbourhood.

For example, there’s no point installing granite benchtops and premium kitchen appliances in a house that’s located in a low socio-economic area. Spending $50,000-plus on a new kitchen in a house that’s located in a ‘working-class’ suburb won’t necessarily be reflected in the value of your property.

Furthermore, the rent returns needed to recover the cost of such a renovation would likely be far higher than what you’re likely to receive.

So it’s important to avoid overspending and knowing the target market you’re renovating for.

Likewise, when renovating to increase equity in your property you must focus on the areas that will generate the best capital growth.

For example, completing major renovations on the backyard, such as adding a dining-alfresco area, isn’t likely to be the best option if the dwelling has an aging interior.

Typically, it’s best to focus on aging kitchens and bathrooms to reflect a more modern appearance.

If the budget allows, extensions can also be a great way to add equity to your property, particularly if you can add an extra bathroom, bedroom or living space.

When completing major renovations, it’s also important to remember the minor aspects as well.

A fresh coat of paint, new carpet and replacing dated blinds or light fixtures can go a long way to creating a complete transformation to your property.

Taking these factors into consideration can help save you thousands of dollars and may mean the difference between your project achieving major success or ending up a costly exercise.

Kick-start your property portfolio

If done right, property investment is a great way for anyone to build huge personal wealth.

However, given there is so much conflicting information, newcomers to property investment can easily become overwhelmed and discouraged.

To assist those considering purchasing their first investment property, Momentum Wealth is holding an informative seminar for beginner investors, ‘Introduction to Property Investing (Property Stripped Bare)’.

The seminar uses simple, jargon-free language to explain the essentials of property investment and how these can help anyone to significantly build their personal wealth.

The seminar will explain the fundamentals of property investment, how to identify the best investment locations, why property prices rise in some suburbs but not others and the key considerations for successful property investment, among other important issues.

Momentum Wealth managing director Damian Collins will present the seminar in Perth on Wednesday, June 17, and anyone considering property investment is encouraged to attend.

For more information or to book your ticket, click here.

The seminar will prove to be a highly-informative evening and a launching pad for beginner investors to build large property portfolios.