Whatever your political views, there’s no denying that the unexpected but convincing victory for the Liberal party at the recent Federal election is an extremely positive outcome for the property sector. Ken Morrison, Chief Executive of the Property Council of Australia said “the election result showed that Australians have rejected the risky changes to negative gearing and capital gains tax that Labor was proposing, and they should be put to rest once and for all as part of this policy review.”
If that wasn’t enough to celebrate, APRA announced its plan to scrap the 7 per cent ‘stress test’ buffer on home loans, effectively allowing for a substantial increase in borrowing power for owner occupiers and investors – potentially up to 20 per cent depending on how you structure your finances. This figure could be even more positive if the RBA undertakes interest rate cuts before the year is out, as is highly speculated. This move by APRA eliminates what has been a major barrier for borrowers in an already highly regulated and scrutinised lending environment.
Let’s look at a real life example of the impact of this APRA announcement
Take a couple, Tony and Lisa who have one dependant child. Tony’s income is $120,000 and Lisa’s income is $110,000. They live in their own home on the Northern Beaches and have a mortgage of $1,000,000 against that home. They are looking to buy an investment property to build a more secure future.
At current lending thresholds, they will be able to buy an investment property for $550,000 assuming a 5% per cent rental yield. In a month when APRA finalises its decision to scrap the 7 per cent servicing threshold they should be able to borrow around $630,000. That’s an extra 14.55 per cent or $80,000 worth of property, with no change to their situation.
If you’ve been feeling uncertain about the property market, now is the time to take a deep breath and get back on track with your goals. There are numerous markets forecast to grow by 7 – 10 per cent per annum, with rental yields of 5 – 8 per cent per annum, making them positive cash flow. When you have equity to secure the investment property and even a buffer cash reserve, you can invest safely and effectively without using any of your current cash reserves. The timing couldn’t be better to capitalise on the renewed market confidence and easing of borrowing restrictions.