New Rules: What You Can Do
If you’re a property investor, rule changes may have left you frustrated and worried that you can’t keep growing. But mortgage broker Catalyst has some smart strategies.
8 October 2021
Winston Churchill once said: “A pessimist sees difficulty in every opportunity. An optimist sees opportunity in every difficulty.”
There’s always something valuable we can get out of difficulty, adversity, or change. We just have to look for it with open minds.
Never has this been truer than over the past 15 months as we’ve all adapted to a changing world.
Changes are something that property investors have had to get pretty used to over the past couple of years.
We saw loan-to-value ratio (LVR) changes, Healthy Homes legislation, capital gains tax, and interest deductibility.
It’d be fair for investors to feel hard done by as government changes look to take away our right to build ourselves a better future.
The latest changes strike right to the core of business as well, making residential property investment the only business activity where we can’t deduct interest as an expense.
It’s crazy stuff but, as I said, with change comes opportunity. If you’re an investor, there are things you can do to help you grow and continue to push towards your financial goal.
The first and most obvious option is to shift your investment strategy towards new-builds.
The government has suggested that new-build investment properties will stay exempt from the latest changes, meaning that interest will remain deductible and the brightline test will stay at five years.
This changes the ballgame of whether to invest in new or existing properties.
It becomes a no-brainer because new-builds are also exempt from the LVR rules and you only need 20 per cent deposit, rather than 40 per cent, and new builds meet the healthy homes rules.
If you have a portfolio of existing properties, run the numbers on them based on the new rules to see whether it’s worth replacing with new-builds, or if it’s still viable to hold on to them. Don’t simply assume your best course of action.
Restructuring your lending
LVR rules have been a factor for investors to consider for a long time now – since 2015, when they came in.
They’ve been brought to the forefront again in recent times with the move back to 40 per cent deposits earlier this year.
In the space of three months, the deposit investors need went from 30 per cent, to 20 per cent, and then out to 40 per cent to cool the market.
On the face of it, this nailed investors’ access to equity and stopped them from growing.
What most investors don’t realise, though, is that a clever restructure of your portfolio and refinancing of some lending can potentially free up equity you didn’t think existed.
This is because a dollar-for-dollar refinance is exempt from the LVR rules. Dollar-for-dollar refinancing is lending with no overall increase in debt.
This can be particularly effective where you have multiple properties with one bank.
Here’s an example of where this could work:
Let’s assume you own two properties – your home plus one investment – and both are with one bank, with total lending of $900,000, split like this.
If you look at this really simply, there’s only $12,000 of usable equity with this current structure, which pretty much means you’re stuck.
However, if you were to restructure your lending and do a dollar-for-dollar refinance of your investment lending, you would separate your properties and open up the ability to leverage a further $100,000 of equity.
You’ll be opening up the possibility of buying again, when you might have thought it wasn’t possible.
Near-banks are your friend
Near-banks and non-banks are becoming more competitive.
In Australia, they take almost 20 per cent of all new lending, while in New Zealand, that percentage’s been hovering around 2-3 per cent.
Now that’s changing as a growing number of borrowers see them as a genuine alternative to the main banks. Interest rates in the sub-3 per cent category help, of course!
The good thing about these lenders is that they largely aren’t governed by the same rules as the banks.
This means they can be more ‘creative’. They may lend with lower deposits, accept less than two years’ financial statements, or use a lower test rate to assess your borrowing potential.
Non-banks have for a long time been seen as a last-resort lender, but markets like this open up big opportunities for these lenders (and new ones) to come into their own as a real option for homebuyers.
Smaller new lenders – such as Squirrel’s new Launchpad – use technology to be more agile in a way that the bigger banks simply couldn’t dream of.
That means they can get their cost of funds to a level that actually makes borrowing from them appealing.
Look for the silver lining
The simple reality is that change is always going to happen, in any market.
At first glance, it can be frustrating, and I’ll be the first to admit that I’ve felt a decent amount of that frustration because I’m an investor myself.
However, there’s always a silver lining.
Investors who see change as an opportunity and look for ways to use it to their advantage will continue to grow. You’ve just got to know how to swing things back in your favour.
Informed Investor’s content comes from sources that Informed Investor magazine considers accurate, but we do not guarantee its accuracy. Charts in Informed Investor are visually indicative, not exact. The content of Informed Investor is intended as general information only, and you use it at your own risk.
Informed Investor's content comes from sources that Informed Investor magazine considers accurate, but we do not guarantee its accuracy. Charts in Informed Investor are visually indicative, not exact. The content of Informed Investor is intended as general information only, and you use it at your own risk.