The new complexities of residential lending rates
Recently I had encountered a ‘real life’ situation that highlighted some areas of concern. Let me set the scene. A client had approached myself to look at funding the purchase of a residential investment property. They had already made a basic enquiry as to interest rates & terms from several other lenders. In our discussion it was mentioned that the other two lender representatives had advised the client to look at the finance from the aspect of it being an ‘owner occupied’ property & not ‘investment’. Their reasoning was because the interest rate would be substantially lower, which is a fact, but what they are suggesting is illegal. As I had explained in prior newsletter articles, the Government regulator APRA had issued direction & was implementing new minimum liquidity requirements on lending institutions because of their concern over the emerging ‘property asset bubble’, particularly in metropolitan areas of Sydney & Melbourne, & particularly in relation to investment purchases. In the last (6) months of 2015 investment loans as a percentage of total residential lending in Australia were increasing at an alarming rate. The Australian Government viewed this from a macroeconomic (broad) national risk position. It has, & may continue for some time to come, increased the cost of writing these ‘investment’’ loans to the lenders, so they have passed that cost onto the clients. In some cases the difference between residential owner occupied lending rates & investment lending rates can be well over 1.00%. Although the difference is reduced because of the tax effectiveness, it’s obviously still better to be paying a lower cost for the loan funds from a cash perspective. So back to the case in question. Here are the areas of concern:-
The client is executing a declaration in the loan application as to the purpose of the loan & false declarations carry penalties, i.e. it is the client who ends up dealing with the consequences.
The ATO via subpoena if necessary, has access to the client’s financial details from any source (lender, accountant, broker etc. etc.)
The external accountant / tax adviser should always be consulted prior to entering into such a transaction because of the taxation implications that could apply on disposal of property assets & treatment of deductible expenses.
Now as it happens COMPASS lending & finance have been able to put the correct facility in place for the clients in question, & at an extremely competitive interest rate, with strong terms & conditions. The reason for this is that not all lenders carry a large percentage of investment lending on their loan book, so they are able to meet their required obligations to the Government & still be able to lend at much more competitive rates.
When changes like this occur you should engage a specialist to consider the impact of those changes on your needs. So talk to us here at COMPASS lending & finance.- (02) 65832211