From lease docs to fixed rates: How investors are adapting to tighter lending
In the aftermath of the self-managed super fund (SMSF) loan borrowing changes, investors have been switching to commercial property, refinancing, and lease doc loans to improve their borrowing capacity.
On The Smart Property Investment Show, Finni Mortgages principal, Eva Loisance, said that the recent property reforms had shifted the lending environment, with investors seeking out new ways to grow their wealth and scale their portfolios.
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According to Loisance, one common misconception around the SMSF deadline was that borrowers believed they needed to sign a contract and have their finance and settlement approved by 9 August.
“It’s not the case; we can still get the contract on the 9th and have finance and settlement two to three weeks later, even further than that. So you just need to have a contract signed.”
She said solicitors and conveyancers would ensure that contracts contained finance clauses so that borrowers were protected if they couldn’t obtain the funds.
According to Loisance, brokers could reasonably quickly undertake SMSF loan pre-assessments to ensure investors had everything they needed.
“If someone calls me, I can be like ‘yes, you can do this or look it’s not going to work for this, you should look at this price point’, or we need to do this’.”
“It’s not like outside of SMSF, where you need to know the monthly expenses, how many credit cards you’ve got, and ‘what about your commission?’”
Loisance said there had been a recent change in behaviour in light of the SMSF changes, with investors being slightly more uncertain about the pathway going forward.
“We do see clients coming back with, okay, well this is what, what has happened, what can I do now? What techniques can we use?”
Beyond SMSF
She said investors had been considering whether to enter commercial property, buy off-the-plan deals and new builds, or adopt a property-flipping strategy.
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“There’s new discussion happening on how to work around what’s happened.”
She said many investors were opting to refinance and cash out on their wealth to grow their portfolios, with some taking out much of their equity to buy their next property.
“I think they want to be in a very strong position to just go and buy without a finance clause, to go to auction and bid hard.”
Loisance said that, with some investors switching to commercial, lease docs provided an opportunity to obtain finance based on the lease income of a commercial property.
“We’ve done lease docs a lot probably three, four years ago and it died off with interest rates going up.”
“We just need the lease against the commercial property, and to know whether that is servicing the debt, yes or no? That’s it.”
Loisance also said some investors may borrow against equity in their existing residential property, use it for the deposit for the new commercial purchase, and obtain a lease doc.
“So the more you’ve got to put towards the property, the lower the loan is and the more chance you’ve got to make it work on the lease doc.”
However, she noted some lenders didn’t like when borrowers refinanced residential properties to fund commercial investments, as it increased their risk profile.
Loisance also said some lenders were now assessing borrowers on fixed rates rather than variable rates plus a buffer, which can help boost investors’ serviceability.
“We’ve seen over the last two months more than 20 lenders reducing their fixed rate.”
Loisance said that for investors with LVRs (loan-to-value ratio) over 80 per cent, those with variable rates would see interest rates rise, whereas investors with fixed rates were more likely to be protected.
“Fixed rates are a technique to increase servicing, and I think people don’t look at it because fixed rates aren’t great at the moment.”
