Banks are finding new ways to accommodate property investors after tax changes and falling prices put a chill through the housing market. Major bank Westpac announced its earnings this morning, telling the market it expects investor home loans to more than halve over the next year.
But non bank lenders are moving in, luring landlords with new loan products such as AMP’s recently launched 40-year mortgage with a decade of interest only payments. It’s designed to make it easier for investors to afford the holding costs of the property, but it will also restore some of their borrowing power after the budget hit, says Esha Frykberg, partner and broker at Melbourne’s Market Street Finance.
“It’s mainly, from my point of view, a borrowing capacity lever because obviously with negative gearing removed, investors have had their borrowing capacity reduced pretty substantially,” he told Yahoo Finance.
RELATED
A majority of investors will opt for interest only (IO) loans to avoid having to pay the principal, with most IO terms spanning for a maximum of five years.
“But that meant that their borrowing capacity was reduced further because they’re being assessed on a 25 year loan term,” Frykberg said. The AMP ‘Equity Flex’ loan offers investors 10 years no-reassessment interest-only but because of the extended life of the loan they are assessed for repayments on a 30-year basis.
Taking an example of a couple who both have an income of $120,000 and pay $3,000 a month in rent, Frykberg calculated that prior to the budget, the couple could’ve borrowed about $1.3 million for an investment property, and then without negative gearing after the budget that drops to $1.05 million.
“But that gets dropped further by an extra $50,000 if we apply five years of interest only,” Frykberg said. “So [the 40-year loan term] is kind of giving them an extra $50,000 and restoring some of that lost borrowing power.”
When launching the product on July 30, AMP said it was hearing from brokers there was demand for such a product noting the budget changes “are creating a divide in the property market, with existing investors retaining current tax arrangements while future buyers of established properties face tighter rules”.
AMP wouldn’t say how many applications it has received for the specific loan but a spokesperson told Yahoo Finance the bank had “seen strong interest from property investors and brokers since launching the loan. Particularly among those looking to create cashflow and to achieve greater flexibility in how they structure and manage their borrowing.”
