On Tuesday 9 December 2014, the Australian Prudential Regulation Authority (APRA) wrote to authorised deposit-taking institutions (ADIs) outlining further steps it plans to take to reinforce sound residential mortgage lending practices.
Now that August 2015 has arrived, APRA are cracking down on this rule for banks to limit their annual growth in property investor loans to 10 per cent.
It is important to note though that this APRA rule only applies to ADIs and does not affect the non-bank lenders. It also only affects investor lending and does not
affect owner occupier loans.
So who exactly are non-bank lenders
? As the name suggests, a non-bank lender (or a non deposit institution) is an institution that is not a bank, building society or credit union, but offers loan products to consumers. Non-bank lenders include RAMS, Mortgage House and Resimac to name but a few.
In comparison, an ADI (Authorised Deposit Institution) includes banks, building societies and credit unions and is authorised to take deposits from customers. They include your big four banks: Commonwealth, Westpac, NAB and ANZ.
ADIs actually account for the majority of lending in Australia, and the Commonwealth Bank of Australia (CBA) raised 67 per cent of its funding for mortgage lending from deposits in 2013 which has increased over the last few years, according to The Australian Mortgage Report 2014 from Deloitte.
According to the Australian Debt Clock, housing debt now accounts for $1.4 trillion and according to research from Barclays, Australian households are the most indebted in the world.
The biggest concern APRA has is that banks and ADIs lend our deposits and savings to investors, which is the highest it’s been than at any time before. The problem arises when the market suffers a major economic downturn which will put all of our savings at risk as the ADIs have loaned this money to investors and we will be left with nothing.
As investors are purchasing investment properties, they can wipe their debt clean by selling off their investment property and have money in their pocket. In order to mitigate this risk we can spread our money into different ADIs so if one ADI was to collapse, at least we won’t lose all of our lifetime savings in one blow.
With interest rates currently at an all-time low, property investor activity is flourishing and APRA has a right to be worried as a major economic downturn could have a major negative impact on the whole economy.
In order to protect us and try to limit the amount of investor loans and debt, APRA in December 2014 announced that the maximum annual growth of a loan book for investors is 10 per cent.
Put simply, if a bank wrote $80 million of loans this month, then the maximum amount of loans that it can allow investors to have is $8 million, whilst owner occupiers are entitled to $72 million. This in turn reduces the bank’s availability to provide investor loans once it reaches its 10 per cent cap.
Instead of refusing to give out any more investor loans once it has reached its limit, (as this would cause chaos in the marketplace), ADIs instead are making credit policy much more difficult, and one way of doing this is to raise the amount of deposit an investor requires from 10 per cent to 20 per cent. This in turn will push out those who can really afford the loan and those who might struggle.
Even though ADIs are being hit by APRA, property investors need to remember that non-bank lenders are not affected and if they are struggling to be approved a loan come settlement, then the next best thing to do is to use a non-bank lender.
There are various non-bank lenders that still allow investors to borrow up to 95 per cent of the property purchase price (for example, RAMS) due to these types of lenders sourcing funding from overseas investors.
APRA is not so concerned with non-bank lenders as it is investor’s money rather than Australian savings that are affected if things go pear shaped.
If you are a first time property investor struggling to get a loan approved from an ADI, then you should consider a non-bank lender, rather than be forced to sell or not buy an investment property at all. There are a number of benefits of using a non-bank lender compared to using an ADI. These benefits include:
Benefits of a non-bank lender
- Competitive rates and generally a cheaper alternative
- More flexible to meet your needs and requirements
- Less strict lending criteria
- Ability to borrow more
- Greater range of niche loan products to suit you
- Low set up and ongoing costs
- More personalised customer service
To find out whether a non-bank lender could be the right move for you, contact iBuyNew today for your obligation-free finance quote, and a full list of non-bank lenders.
Published on 14th of August 2015 by Marty Stanowich