This lending crackdown could quite possibly increase the risk for off-the-plan apartment investors, who may not be able to complete their purchases because they can no longer get finance from the banks.
What’s the deal?
In 2015, the Australian Prudential Regulation Authority (APRA), which regulates the Australian financial-services industry, introduced new rules to limit investor borrowing. The reason for APRA’s move was to get Australia back to healthy lending practices by helping to stabilise the banking sector, which had recently seen massive growth in lending to property investors.
The banks have reacted by putting stricter lending policies to investors in place – increasing interest rates, requiring borrowers to come up with bigger deposits, and even refusing to lend money at all. In other words, they’ve made it more difficult and more expensive to get an investment loan.
What does this mean for off-the-plan apartment buyers?
These new policies could be especially bad news for off-the-plan homebuyers. In the past, buying apartments off-the-plan has paid off for many property investors, even though buying off-the-plan apartments has always had some level of risk. But now, this lending crackdown could quite possibly increase this risk for off-the-plan investors, who may not be able to complete their purchases because they can no longer get financing from the banks.
Here’s how it works with off-the-plan investing: Investors agree to buy the property – at an agreed-upon price – before construction on the building even begins. Of course, part of the risk is that you never really know what the property market is going to do while the property is being built. (You hope the value of the property goes up.) Off-the-plan investors usually put down a deposit of 10 or 20%. And it wasn’t that long ago that banks were more than willing to lend money to property investors, financing that remaining 80 or 90%.
However, because property buyers can’t get approved for mortgage loans until shortly before settlement of an off-the-plan property (preapprovals are generally valid for only 90 days and still have some conditions), they run the risk of not being able to come up with the outstanding money when the building is complete, particularly if the bank’s lending criteria have changed since they contracted to buy. Thanks to the new guidelines, they risk defaulting on their contract, losing their deposit, and even facing a lawsuit from the off-the-plan developers.
This could impact a lot of property investors. Last year, the Australian Financial Review reported that according to Australian mortgage brokers, 90,000 off-the-plan apartments had been sold across the country, were undergoing construction, but had not yet completed purchase. The AFR article goes on to say that of these 90,000, roughly 18,000 have paid only a 10% deposit towards the full purchase price. For these investors, it may now be a lot harder to get that outstanding 90%.
Allied Investment Group advisers specialise in assisting clients take control of their finances so they can have more choices and security now and as they plan for the future. If you have more questions about the new APRA guidelines or off-the-plan property investment, call us on 1300 886 149.