The founder of one of the country’s biggest property investment clubs says its 20,000 investors can’t afford their mortgage repayments after the banks shifted them from interest-only loans to principal-and-interest mortgages earlier than they expected.
“How would you manage if your bank told you you had to pay 45 per cent more per month on your mortgage?” Kevin Young, founder of Queensland’s Property Club (previously called The Investors Club) told The Australian Financial Review.
“We’re advising our members to get themselves into conflict with their bank, to say they can’t afford principal and interest repayments without ending up in financial stress. Most of the time, the bank will acquiesce,” he said.
Mr Young, who claims to own a portfolio of nearly 200 properties making him the country’s “largest individual residential property owner”, said he had been forced to sell some of his own properties due to the lending changes. Interest-only loans typically cover a fixed period (up to five-years) and are charged at a higher interest rate, before reverting to principal-and-interest repayments for the remaining period.
According to calculations made on the Australian Securities and Investments Commission’s Money Smart consumer website, a borrower taking out a $450,000 interest-only loan at a rate of 4.5 per cent over a three-year period would see their repayments rise over $1000 a month – or 59 per cent – once the loan shifted from interest-only to principal-and-interest.
They are popular with investors who hope to benefit from any capital appreciation during the interest-only period and then sell for a profit. However if house prices fall (as is starting ot happen with capital city prices falling 0.3 per cent in December according ot CoreLogic), investors can end up with very little equity or even in negative equity.
Since the end of March last year, the banks and other deposit-taking institutions like building societies and credit unions have cut back heavily on interest-only lending following new guidelines set by the Australian Prudential Regulatory Authority as part of measures to de-risk and cool the housing market.
In addition to forcing borrowers to start paying off the principal amount of their home loan earlier, some banks have also been increasing rates on interest-only loans overnight, according to Walter Nanni, an associate at buyers agents Cohen Handler.
“While this is most clearly seen with specific banks, I’d expect others to follow in due course, contributing to a more challenging landscape for investors,” he said.
Alongside Mr Young and his Property Club members, other prominent investors are also running into trouble due to the banks tightening up their investor lending policies. The Financial Review revealed last week that Sydney investor Nathan Birch was sued by his lender last year after his company defaulted on a mortgage over a Gold Coast investment property.
“APRA has done a lot of damage trying to fix a problem that did not exist,” Mr Young said. He said the changes effectively meant that a typical investor could not own more than two properties and predicted more retirees would have to sell their investments and rely on the age pension.
Excerpt from AFR web site January 5, 2018.