What You Need To Know About Banks And Real Estate
Banks are intrinsically tied to Sydney’s real estate market, so it’s vital to understand the obvious and more subtle ways that banks can impact your potential property purchase.
There are numerous factors that directly and indirectly influence the Sydney property market. With the endless speculation over the future of the real estate market, it’s important to understand the factors at play, and one of them is the banks.
Banks determine your borrowing power
Banks are often the gatekeepers to entering the property market, especially for first time buyers or investors who are usually reliant on a loan to make their market debut.
They take into consideration various parts of your financial life, including your ability to service a higher interest rate, your expenses and credit cards.
Above the banks sits APRA, Australia’s banking regulator, who monitors potential risks in the market and will adjust regulations on banks depending on the conditions. For example, in 2017 APRA imposed tighter restrictions on lenders, which then has had flow on effects to customers.
Interest rates influence mortgage repayments
Speaking of flow on effects – historically, interest rate rises mean greater repayments for borrowers as banks pass on a percentage of the increase. Despite the cooling of Sydney property prices in the past months, the Reserve Bank of Australia (RBA) has held off on an interest rate rise, leaving the rate at 1.50% since August 2016.
While this has taken the pressure of first time buyers and investors, recently we’ve seen mortgage interest repayments rise at their fastest rate in 7 years.
Banks help to control the influx of foreign investment
Foreign investors often look to local banks for their loans as well, meaning the regulations enforced by banks can have a powerful impact on the number of foreign investors entering the market.
Jonathan Kearns, Head of Financial Stability at the RBA, stated that “historically, residential property lending has been less risky for banks than commercial property lending,” indicating that banks tend to enforce greater regulations on foreign commercial investors as opposed to domestic residential buyers.
For example, recent changes led to a 43% drop in demand from Chinese investors in off-the-plan properties, making space in the market for domestic buyers.
A low LVR is both a bank’s and buyer’s dream
To mitigate risk, a bank will measure your loan viability by calculating how much you intend to borrow (your loan amount) as a percentage of the total value of the home or investment property you plan to buy called the loan to value ratio (LVR).
Typically, banks require you to have a deposit of 20% or more, meaning an LVR of 80% or below, so you avoid the additional costs that come with the risk of borrowing more. For suburbs that are deemed high risk, banks such as Citi and NAB require a lower LVR and have tighter loan criteria to mitigate potential losses.
You can use an LVR calculator online to estimate the initial deposit you’ll need depending on the price and position of the property, therefore helping you calculate future repayments.
SMSF shake-up traditional lending
Can you use super to buy a house? In short, yes.
Self-managed superannuation funds (SMSF) are an option, however it’s important to understand the risks and requirements associated with this type of financing.
Banks have SMSF loan liquidity requirements, meaning you must retain a certain amount of cash after you’ve established your mortgage. Other factors banks assess for SMSF loans include your contribution from your job, potential rental yield and your LVR.
While there was initially rapid growth in this type of loan, more recently there has been increased regulation by banks around SMSF and lower number of banks even offering SMSF loans.
Decreased demand for housing finance is good for buyers
In line with the laws of supply and demand, a continued downtrend of owner-occupied and investment housing finance commitments has led to competitiveness when it comes to mortgage rates offered by banks.
This “fixed rate war” between the major banks provides a safety net for buyers who are less likely to experience a sudden rate rise.
Despite seeing Sydney labelled as a buyers’ market at the start of 2018, the Eastern Suburbs in particular is set to continue to provide stability for both buyers and sellers in their long-term property value.