Mum-and-dad investors at risk as big banks raise rates

Mum-and-dad investors at risk as big banks raise rates

Off-the-plan investors will be the big losers as the big banks are expected to follow Westpac’s lead and raise variable mortgage rates, says QUT property economist Professor Chris Eves.

“The banks are getting nervous about overexposure to the property investment market, especially with the new lending regulations, and they are saying the RBA is not slowing the market down so we will,” Professor Eves said.

“They have lent a lot of money and if the market flattens or drops they become exposed. All indicators are suggesting a drop in property markets in 2016-17, partly due to an oversupply of inner city apartments.

“If a bank lends 100 per cent of a $500,000 investment housing loan with security over the investor’s home – they get nervous because if they have to act in a falling market and have to sell for less than $500,000 they don’t want to rely on the borrowers existing home equity to recoup their loss on the investment property.

“The HSBC has already announced it will no longer lend for residential property investment.”

Professor Eves said Westpac’s move was prudent and the banks still had time to save themselves.

“In retrospect it might be six months too late but they are now asking borrowers to pay a higher margin to make up for the higher risk in the residential unit market,” he said.

“Where the big impact will be is on those who purchase off-the-plan at today’s value on the basis they will pay for it in the future. They are taking a gamble that the value will have increased when it comes to final payment on completion of the development.

“Most investors put a 5 or 10 per cent deposit on, say, a $550,000 apartment and pay the rest on completion.

“But if the market stays flat or goes down, they’re in trouble. At completion 18 months later the bank sees the value has dropped to $470 and will lend only at that value so the borrower is left to make up the shortfall.”

Professor Eves said owner occupiers would not face the same issues provided they could finance any drop in value.

“The fall in the market will affect the mum-and-dad investors most. Renters will benefit from lower rents as investors struggle to find tenants.

“Rents can drop rapidly by 10 to 15 per cent and it takes a long time for them to recover.”

ENDS

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