How smart investors are thriving in a tight lending environment

October 25 2018

Regulatory bodies have made changes in the lending environment in the hopes of slowing down lending and alleviating the affordability issues in major Australian property markets. As a result, credit assessment has become more conservative, putting emphasis on responsible lending and borrowing.

According to Atelier Wealth’s Aaron Christie-David, by 2020, an estimated 200,000 of interest-only loans worth around $480 billion will expire. Due to more conservative lending practices, most investors are likely to revert back to principal-and-interest loans rather than be able to extend their interest-only terms.

Being reverted back to a principal-and-interest only loan could mean paying $7,000 worth of mortgage repayments every year. Moreover, after a five-year interest-only term, the investor will only have 25 years to pay down their debt.

As troubling as it sounds, Mr Christie-David said that, more than ever before, investors should be able to take control of their portfolio with confidence.

“If you bought this property for a reason, stick to your guns. The game plan’s changing a little bit but you really need to get comfortable in your own skin and say, ‘Everyone’s about to come into a bit of a storm. What do I need to weather this storm?’” he said.

The mortgage expert said that there’s three commonalities among investors who thrive in the current lending environment:

1. Awareness and the right mindset

First and foremost, smart investors are aware of the impact of market fluctuations and the possible ‘dangers’ that they might encounter along the way. While they recognise the more complex processes they have to work through, they seek to understand the current environment instead of being driven by panic or swayed by negativity in the media.

As a mortgage broker, Mr Christie-David has made it a point to raise awareness among his clientele, particularly those who have been using interest-only loans.

“What we’re trying to say is don't dig your head in the sand. Instead, get on the front foot and work out your options now because if you need to readjust your budget, at least you've got the 12, 18 months to start pulling the purse strings now rather than when lending gets tougher.”

Doom-and-gloom headlines may faze some people, but smart investors keep a clear head and maintain order despite the unpredictability of the current property market.

“Budgets, cash flow, their team—they’ve got it sorted out so they can sleep better at night knowing that their portfolio is taking care of themselves,” the mortgage expert highlighted.

2. Investment team

Good investors know that having the right team to support them can spell the difference between success and delays in their wealth-creation journey. Now that the property markets are in flux, having the guidance of reliable experts and professionals has become more critical.

Mr Christie-David said: “Just like running my own business, I need the right team around me to do my annual reviews to see where our numbers are going consistently. It’s important to have a good team that you can rely on.”

Mortgage brokers, financial advisors and other property professionals can assist investors in keeping track of the changes happening in the field while also helping them maximise the opportunities present without being exposed to too much risk.

3. Strategy

Finally, the investors who will continue to thrive across the property markets of Australia are those who stick to their long-term strategies.

At the end of the day, every market experiences fluctuations. If investors make drastic decisions every time there’s an unpredictable movement in the market, it could be hard to grow and maintain a substantial portfolio.

”It's not about chasing shiny objects. It’s about having the confidence to say, ‘Look, here's the property that we're buying and we’ve got the shred to hold it for 10 years. Over that course, we can start to leverage that property if it's starting to do really well,’” according to the mortgage expert.

Interest-only to principal-and-interest

Amidst the tight lending environment, one of the things that investors need to be well-prepared is the expiration of interest-only loans, which could heavily impact their cash flow as principal-and-interest loans will require them to make higher mortgage repayments.

Mr Christie-David said that there are three ways to deal with the change—one, to make peace with principal-and-interest loans; two, to let go of the asset by selling up, and; three, to increase rent in order to manage the increased costs of holding the property.

Of the said options, the first one is the most advisable, according to him. After all, the increasing supply in the market had softened rental incomes, which could make selling up or increasing rents harder to accomplish in today’s property market.

“You bought it for a reason. Now, it's about having that long-term vision to go, ‘I'm going to hold it through this’—let’s call that a pain period. But, you’re going to come out of this a better investor,” he said.

Instead of selling up or increasing rent, the mortgage expert advised investors to develop a better way to manage their cash flow, whether it’s through a reassessment of your living expenses or a revision of your investment budget.

According to Mr Christie-David: “Work out how you're going to hold onto it. With interest-only loans coming off, you will need to shift to P&I, so do the sums with your broker. I'm sure they can help you out regardless of what would happen.”

Long-term investment

At the end of the day, reverting back to principal-and-interest loans isn’t all bad news for investors who have come prepared for the transition. Using the said type of loan can even fast-track your wealth-creation journey by allowing you to pay down the entirety of your debt.

The mortgage expert explained: “A lot of investors start out going, ‘I want to have that passive income stream coming in,’ and I say, ‘How would you do it when you've still got investment interest-only loans 20 years down the track?’ That doesn't fly.”

“What we're trying to do is help people pay off the principal, keep chipping away as much as they can. The faster you pay that back to a bank, the more money that you're going to be saving for yourself over the life of the loan. The faster you pay the loan down, the more equity you got in there.”

Mr Christie-David’s final advice to investors: Seek to understand the numbers in your portfolio to know the impact of market fluctuations on your assets and be prepared for them when they happen.

“Just know your numbers. Go back to the drawing board and be very clear on them... If it's interest only, when it's going to expire? Where could that rate go to? Where could repayments go to? Having that knowledge is going to give you that confidence and empower you to be a better investor,” he concluded.

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