Investor lending on the rise

Investor lending is on the rise and one of the key factors driving this increase is rentvesting, where younger borrowers climb the property ladder by buying a property in a more affordable area to then rent out.

The latest data from Corelogic reveals there’s been significant growth in the investor market with investor lending comprising 37% of lending by value – almost a third higher than the prior 12 months.

This is the highest rate of investor participation in the market since ATO tightened depreciation rules in 2017.

CoreLogic said a number of factors supported this growth, including:

• investing can be an opportunity for many to get on the homeownership ladder sooner
• many may have built up equity in their existing property
• strong capital gains in recent years made investing appealing
•  the higher interest rate environment was attractive to investors in terms of negative gearing

The rental market also remained tight with rents continuing to rise at well above historical average levels. Although rental growth rates appear to have peaked, they were still growing across regions and capital cities.

Gross rental yields are tracking at around 3.5% for capital cities, and 4.4% for regional markets.

MPA spoke to Charlie Loveridge (pictured above left), a senior credit advisor at Sydney brokerage Shore Financial, and ING Australia head of consumer market insights Matthew Bowen (pictured above right), to gain an understanding of the investor loan market and what’s driving growth.

Broker’s view of investor lending growth

Loveridge has been a mortgage broker for 10 years, focusing mainly on residential borrowers, either owner occupiers or investors. While he has clients all over Australia, the majority are based in the eastern suburbs of Sydney.

While it varies each month, Loveridge estimates he has a roughly 50/50 split of owner occupier and investor clients.

“I would say that the investment side has probably ramped up over the last 12 to 18 months especially,” Loveridge said.

“ A lot of clients would be Sydney-based mums and dads, who have a home and are looking at releasing some equity to buy an investment property in their own names or a trust or a company or even an SMSF. We're doing a lot more SMSF lending these days.”

A lot of these mortgage-holders were looking to diversify their portfolio and buy an investment property in Perth, Adelaide, or regional towns such as Townsville or Mackay.

“There’s been more of an uptick of existing customers that own their own home and have available equity but they don’t have enough borrowing capacity to buy an investment in the city property market,” Loveridge said.

Loveridge said there were also more and more younger borrowers that found themselves locked out of the expensive Sydney market and were looking at rentvesting to get on the property ladder and start building wealth.

Barriers to entry in terms of serviceability or affordability are a big factor in the rise of investor lending, he said.

“Unless they have a very large helping hand from the bank of mum and dad, they can’t quite put together a big enough deposit to buy a home to live in locally … customers living in the eastern suburbs looking at buying a one or two-bedroom apartment in Bondi for $1.5 million – the deposit requirements are enormous,” he said.

Loveridge said many of those clients in Sydney didn’t qualify for the Home Guarantee Scheme due to the income test so they had to pay LMI.

A rising number of customers in this situation were considering buying an investment property in a good area with high growth and good yield so they could grow their equity.

“A lot of clients I think are probably looking at investment because either they don't have the deposit to buy in Sydney or they don't have the borrowing capacity to buy in Sydney,” said Loveridge.

Shore Financial had also experienced a greater level of inquiries and applications from people wanting to buy investment properties through their self-managed super funds.

Popular areas for rentvesting

Loveridge said a number of cities and regions had proved popular with investors including Perth, Adelaide, Newcastle and the Central Coast, Brisbane (especially with infrastructure improvements and the 2032 Olympic Games) and Queensland towns such as Toowoomba, Townsville, and Mackay.

“These are areas where there’s less stock, growing demand, and prices have been growing,” he said.

Rental yields are also higher – in Sydney an investor could expect a 3% yield while in an area such as Townsville it could be 6%. “It’s a lot easier to maintain the property because the income is significantly greater – all investors are looking for a good combination of capital growth and rental yield.”

ING’s view of the investor market

Bowen said there were a number of drivers supporting the growth in investor loans.

“There's now a lot more stability in the interest rate environment,” Bowen said. “Investors are much more confident about interest rates being stable for the short term after 13 consecutive rises.”

“But then also growth rates of both house values and rentals are starting to stabilise as well. We went through this period where rental price growth was 15% last 12 months in the first quarter of this year.”

This rental price growth had come back “ a little bit”, suggesting that rental values had peaked, Bowen said. Equally, dwelling value growth had fallen from over 9% back to just over 7%.

Bowen said for consumers investing was a great way to enter the property market sooner and benefit from capital growth.

“It may not be your dream home, but we’re all very familiar with the idea of rentvesting – buying in a city you can afford but living close to the one you love via renting,” he said.

Homeowners were also looking to unlock the equity in their homes by buying an investment property.

Bowen said brokers were a big part of ING’s network and brokers were seeing more clients seeking loans to invest.

ING broker-originated deals for property investors currently account for 34% of all loans, while owner-occupiers account for 66%. 

Bowen said ING had made changes to its negative gearing policy to expand the borrowing capacity for property investors.

Previously, negative gearing benefits were assessed at a fixed rate of 2.00% p.a but ING now assesses negative gearing at the borrower’s interest rate, which could be as high as 6% p.a.

Bowen said it was a positive change for brokers as ING could service more of their clients and it was great news for property investors too.

The negative gearing change, which came into effect on July 26, had resulted in an increase in investor settlements from 26.6% in June to 33%  in September.

“The increase to investor growth will facilitate our goal of doubling our market share as well as providing a higher ROE,” Bowen said.

ING has also stayed consistent with its loan service levels despite high volumes and its current turnaround time is three days, he said.

Property Pals

ING is also promoting property investment through its Property Pals scheme, which involves a borrower purchasing a property by joining forces with a friend and becoming joint applicants.

“Rather than trying to buy a house on your own, you can get into the market faster if you combine your deposit with someone you know and trust,” said Bowen.

Property Pals showed younger people that there were alternative ways to achieve homeownership.

Research conducted by ING in February of more than 1,000 Australians showed that 47% who had bought a property or were considering purchasing a property, would consider buying with a friend.

Investor-friendly policies

Loveridge identified a number of ING’s policies which were beneficial for clients when it came to borrowing to purchase an investment property.

He said lenders such as ING had tweaked credit policy to allow for greater borrowing capacity, taking into account the RBA’s hiking of interest rates had diminished borrowers’ serviceability and borrowing power.

Where most lenders used 80% of proposed rental income in a serviceability assessment,  ING took into account 95% of gross rental income.   

Loveridge also praised ING’s negative gearing changes which boosted borrowing capacity.

“One thing ING also does well is the property share (Property Pals). Two friends want to buy a property together and they don’t want to be responsible or liable for each other’s portion of the debt,” Loveridge said.

ING’s common debt reducer policy meant the bank only incorporated a borrower’s percentage ownership of the debt in assessing borrowing capacity.

The bank said under the policy, there are two separate applications for the one security, with one applicant and one security guarantor on each application.

If one of those applicants has a completely separate property and they jointly own this with a different person and both are on loan and title of that property, ING may apply the common debt reducer policy to that particular loan, up to a portion of 50% of the debt into the servicing (if meets all CDR requirements).

Loveridge said he was also using ING loans for investors due to their pre-approvals, which allowed clients to “go out and shop with confidence”, especially in Sydney’s eastern suburbs where cooling off periods were rare.

ING pre-approvals were usually turned around in 24 to 48 hours and the applicant would receive a conditional approval valid for 90 days. 

Loveridge said the other areas where ING performed well include:

• competitive interest rates for 80% to 90% LVR loans
• lending to all postcodes up to 80% LVR, with only a handful of postcodes with restrictions (from 95% to 90%)
• guarantor and family pledge loans which allow customers to borrow 100% of the purchase price
• ING’s parental leave policy which means applicants have up to two years to return to work