APRA's recent decision to change lending guidelines is ringing alarm bells around the nation.
Already, lenders are tightening their belts as they keep close tabs on how much investors can borrow to ensure investment lending growth stays below 10 per cent per annum.
Remember, this was essentially forced upon them and with severe consequences if they do not comply.
This, in turn, is causing major concerns as investors could now potentially lose their deposits and even face possible legal action if they can’t settle on unconditional contracts.
I’m dealing with a finance client in this exact position. The client was unconditionally approved for an off-the-plan purchase of an apartment. Just six months ago, the loan serviced comfortably, and received quick approval from a major Australian lender.
Unfortunately, the development was delayed and the approval lapsed. When we re-submitted the finance, the loan failed to service and was declined.
Obviously, this is terrible news to a client who has paid a non-refundable $50,000 deposit to the developer and was locked into an unconditional contract.
Even more tragic for the client is that the rejection had nothing to do with their personal circumstances, which ironically had actually improved, but because the lender had complied with APRA’s forced changes.
These changes meant the servicing calculator the lender used to determine borrowing power was adjusted, giving a much lower borrowing power despite being based on the same income, assets and liabilities.
The result was the client could no longer access the loan for which he had previously been approved. In fact, the final numbers were not even close.
The dilemma here for anyone affected by these changes is that they can’t simply go to another bank or ask their mortgage broker to apply elsewhere as nearly all lenders have implemented the APRA changes to drop investor borrowing.
Frustratingly, I don’t believe it needed to happen this way. Nor do I think that APRA fully considered the run-on effects this would have.
Indeed, if APRA felt it had to make these changes then make it applicable to new borrowing only, and allow lenders to give an exception to those previously approved under the old system.
That way, those with existing approval for finance would still have had to reapply if their approval lapsed, but under the old guidelines and lender calculators. Most approvals are only good for six months and most off-the-plan developments take longer than this to settle so reapplying for finance is very common.
Don’t forget, before the APRA changes, there were tens of thousands of off-the-plan contracts out in the marketplace, and I have no doubt that my client is one of several thousand who face the uncertainty of not being able to secure finance again when their off-the-plan purchase is due to settle.
The inevitable consequence of this is that contracts fall over, developers are left with a stream of properties they need to sell and, before you know it, there’s an oversupply.
Sure, purchasing an off-the-plan property has some calculated risks, but no one, not even those with crystal balls, would have predicted that lenders would dramatically drop the amount of funding available to investors based on the dramatic intervention from APRA.
It has never happened before and has caught everyone, even the lenders, by surprise.
So what needs to happen?
It’s imperative that we push for urgent awareness in the marketplace so that potentially affected purchasers have time to consider other options now, rather than a few weeks before they are due to settle on a property.
And for anyone who has an off-the-plan contract that was approved for finance more than two months ago, go back and speak to your bank or broker to confirm that, come development completion, you will be able to settle.