Bank servicing requirements have become increasingly difficult to pass in recent months, causing all sorts of chaos for property investors caught short when it comes time to buy or sell.
And there are a couple of factors at play that are making things so tough.
Rising interest rates have seen test rates skyrocket. Right now, major banks are testing servicing at somewhere between 7.5 to 8 per cent, and that’s damn tough to pass when you’re testing on Principal and Interest over 30 years.
It’s particularly bad news for investors whose main source of income is rental income. With gross rental yields sitting at about 3 or 4 per cent per year (not even enough to cover interest right now), other forms of income are increasingly needed to pass servicing.
In fact, the banks will currently only lend up to about 30 per cent LVR on a standalone basis, while most investors need closer to 50 or 60 per cent gearing.
And although it looks like interest rates are starting to settle, so test rates shouldn’t climb much further (if at all), the removal of tax deductibility on rental income is set to make things harder still. Banks currently factor 70 per cent of rental income into their servicing calculations, but that’s likely to drop to 60 per cent (or lower), within the next year or so to allow for tax.
Against this backdrop, we’re seeing more and more investors who just aren’t meeting servicing requirements, and it’s only going to get more challenging from here.
So, where do you turn when traditional lenders say no?
Enter: the non-bank sector.
Traditionally, because getting bank funding has been so easy, non-bank lenders haven’t been a huge part of the arsenal for property investors.
And while they are generally a bit more expensive than the main banks, in the current environment, the solutions they offer can work really well to address some of the major issues that investors are facing.
Before we get into it, it’s worth noting that non-banks typically won’t deal directly with customers. So if you’re keen to find out more about the options that are available, and whether any of them are right for you, chat with a mortgage broker.
1. Greater borrowing power
A number of non-bank lenders, like Squirrel and Resimac, assess loan serviceability based on interest-only instead of P&I – which effectively lets borrowers access a much higher proportion of funding against the value of the property.
We’re talking up to about 55 per cent LVR even on a standalone basis. Compared to the roughly 30 per cent the banks will go to, that’s going to make a huge difference for investors, particularly those whose income is quite rent-reliant.
As a general rule, these solutions are on the less expensive end of the scale, too. Resimac is offering a loan in market at the moment at 6.09 per cent interest.
2. Bridging solutions
Next up are traditional asset lenders, who don’t test servicing at all.
These guys are more expensive – think interest rates north of 8 per cent, and establishment fees of at least 2 per cent – so they’re not great longer term.
But they’re ideal as a bridging solution where you’ve got a problem that needs a short-term fix until you can find a more sustainable answer, like if a property hasn’t sold as expected or you’re looking to settle a property but don’t meet bank servicing.
Yes, there’s a cost, but better to front up $50,000 in fees, than be forced to fire-sell a property and take a $300,000 hit.
3. Access to working capital
With traditional lenders, accessing working capital can be pretty difficult unless you’ve got a really good reason, and a whole lot of paperwork to back it up.
In the non-bank space, some lenders offer up to $500,000 cash on a property loan or refinancing, without asking you to justify every little detail.