If you’ve been feeling a little lost amid the ever-changing lending policies, take heart. You’re not alone. And you’re not without options. There are finance strategies to help you deal with tighter lending policies by the banks. Nila Sweeney, managing editor of Propertymarketinsider.com.au explains

Despite the seemingly harsh moves by the banks recently, it’s worth remembering that mortgages are still their bread and butter.

This means they are still willing to lend to qualified borrowers.

However, the banks are also under a lot of pressure from the regulators to clamp down on investment lending. So they’re obliged to put in place measures to comply with APRA’s directive to keep their banking licence.

They have to tighten their lending policies. Even raising interest rates on investor loans to rein in investor demand.

So how should you deal with the current tighter lending?

Property Market Insider spoke with award-winning mortgage broker Marissa Schultze of Rise High Financial Solutions for her insights and top tips.

Finance Strategy #1: Weigh the merits of converting from Interest Only to Principal & Interest (P&I)

With the banks raising their rates on Interest Only loans by around 0.35%, it may be worth switching to Principal & Interest as we’ve suggested in our recent article on the counterintuitive strategies to consider now.

Schulze points out that there’s no right or wrong move. However, you need to consider a couple of things before switching.

“If you switch to P&I, you’d be paying principal on your loan, which will reduce the long term tax benefits associated with that investment property,” says Schulze.

There’s also the issue of cash flow. Because your repayments are higher, your cash flow may suffer, which could result in financial difficulty down the line.

“If you end up converting your investment loan to P&I, your higher repayments will bite into your cash flow each week. This will reduce your ability to pay down your bad debts which will not give you a good long-term outcome,” says Schulze.

So when should you consider switching to P&I repayments?

Before switching to P&I, consider taking the following steps.

• Calculate and compare the repayments on the higher rate on the Interest Only loan against the lower rate on Principal & Interest.

If the difference is relatively small and you’re comfortable doing that, then you may want to go P&I according to Schulze.

“The benefit of converting to P&I right now is that you’re going to get a lower interest rate,” says Schulze.

• Look at your current level of non-tax deductible debts.

If you have a high level of bad debts that are non-tax deductible, Schulze recommends that you focus on paying them down as a first priority.

This means that you keep your investor loan on Interest Only. That’s unless the P&I repayment is only slightly above the Interest Only repayment, in which case, it might make sense to switch P&I.

“I’ll only recommend P&I to investors who have a low level of bad debts such as personal loans or mortgages on their owner occupied home,” she says.

“I would never have previously recommended P&I to anyone that has any level of bad debt because they should be focusing on that and then tackle the Interest Only loan once that’s done.

“But now, things have changed. Some investors may have a really strong cash flow and have a small mortgage on their home. It’s starting to make sense because you’re saving 30-40 basis points on the interest rate.”

Finance Strategy #2: Embrace a lower loan to value ratio (LVR)

Another hot button issue is whether you should lower your overall loan to value ratio when borrowing.

Schulze explains that this move doesn’t make sense for some investors.

“It doesn’t make sense to lower your LVR drastically from a leverage perspective,” she says. “One of the great benefits of investing in property is the ability to leverage. You should maximise it as much as you can.”

However, Schulze concedes that from a finance point of view, a lower loan to value ratio will make it easier for you to secure a loan and even get a better mortgage rate.

“You’ll be more attractive to the banks if you have a lower LVR and you will be able to attract a more competitive interest rate as well,” she explains.

But how low should you go?

From an investment perspective, a higher LVR is still a smart strategy according to Schulze.

However, with APRA leaning on heavily on the banks, the ultra-high LVR loans are becoming scarce.

“Even at 90% LVR, you have very limited choices and you’re getting an expensive interest rate at that level,” says Schulze.

As such she believes the sweet spot is 80% LVR and under.

“If you can keep it at 80% LVR, that’s the ideal mark,” says Schulze. “If you have to borrow at 90% LVR, you still can. However, you’ll have fewer options as more lenders are going to move away from this space in the coming months.”

Schulze also points out that a high LVR loan such as 90% now requires a principal and interest repayment.

So not only that you’re paying a higher interest rate, you’re also getting slammed with an even higher repayment as you pay the principal component as well.

“I think 80% LVR is ideal. However, if it means getting into the market now at 90% LVR vs having to wait 2 years to get to 80% LVR, then there’s a merit to getting in now at 90%.

But you need to make sure you’re buying good quality assets that will go up in value,” advises Schulze.

Finance Strategy #3: Choose your broker wisely

With all these changes happening in the mortgage market, it’s important to work with someone who is experienced, knowledgeable and independent.

“Make sure you have the right mortgage broker working for you,” advises Schulze. “It’s impossible to stay across all lending. You also need to make sure you work with a really good mortgage broker with a broad panel of lenders.”

Schulze’s Top Insider Tips

• Always maximise your borrowing capacity.
• Keep a clean credit file. Don’t do too many inquiries.
• As an investor, look at properties with good rental return. You need to have a good cash flow coming from the property because servicing is now harder.
• Beware of brokers that are owned by a bank because their panel is limited.

This article was first published at www.propertymarketinsider.com.au

Nila Sweeney
Managing Editor of Property Market Insider and a former editor of Your Investment Property Magazine.