Many investors currently feel ‘stuck’ despite having a reasonable amount of equity in their properties. Tough lending conditions mean they can’t extract the equity to continue building their portfolio. If this feeling is familiar to you don’t despair; solutions are available.
If you’re an investor who feels stuck with one of the mainstream lenders the bottom line is this: there are options available in the form of alternative non-deposit taking institutions. They have a banking licence but do not take deposits from savers and therefore are not controlled by APRA, making them immune to the recent changes that have altered the investment landscape.
These lenders are solid financially. They just have a different funding model compared to the main lenders, which means they are a safe alternative worth exploring. Usually a little more lenient in terms of lending criteria, their funding may come at a cost (but not always) in the form of slightly higher interest rates or lower LVRs (loan to value ratio).
One word of caution here: if a lender is hesitant to give you a loan, you may be wise to take their rejection as a warning you are reaching your risk threshold. It is never a good plan to push your borrowing to the limit.
Ideally, you should work with an experienced property adviser to ensure you have a serious risk management plan in place involving buffers and an exit strategy.
In recent times, some of our clients have felt so trapped with their loans they have contemplated selling one or more properties in order to free up some equity.
Our view on this is that selling to release equity really only works if a property is not performing; otherwise you could actually find you’ve short-changed yourself in the process. This is because our taxation system is quite harsh: you have to pay capital gains tax when you sell and then another chunk of stamp duty when you buy again.
As a result, this is really only a viable option if you look at it as taking a step back first, to then hopefully step further forward with your next investment. If the property is performing well and giving you good returns, you may be better off holding on to it and attempting to refinance instead.
We’ve heard some investors comment they are biding their time before they make their next move. They are waiting for the financial climate in Australia to recover from all the recent upheaval and return to the conditions we’ve become accustomed to, but we believe this is a mistake.
It looks like we are now living in a ‘new order’ of tightened lending, and it’s unlikely that waiting for standards to relax will work – it’s wishful thinking. Banks may loosen lending criteria slightly in the coming years but, by and large, the good old days of easy lending are now behind us. For investors, the best course of action is to explore your borrowing capacity with a mortgage broker who can compare many lenders and, if your capacity is marginal, alter your investment plans accordingly.
Find a way to access your equity without derailing your long-term strategy, and you could be laughing all the way to the bank (or non-bank lender, whichever the case may be).