Recent Changes to the Lending Environment

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THE CURRENT LENDING environment has changed markedly over the last two months with the main developments being:

  1. Lending to foreign investors has been severely restricted or entirely removed by all Australian banks.
  2. Interest Rates have been cut, with the drop passed on for owner-occupied loans and partially passed on for investment loans.
  3. Concerns have been raised about housing oversupply in certain parts of the country, including Melbourne and Sydney, and lenders have placed increased restrictions on higher density developments. 
  4. Some banks have been advised that their loan books are too heavily weighted to property investment (including commercial) and have thus pulled back their lending ratios.

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    Changes for Commercial Property Investors

    So, how are these changes likely to affect commercial property investors?

    Well, the positive news is that pricing for commercial investment loans are very sharp. And while there is greater difficulty obtaining higher lending ratios from some of the major banks, commercial investment lending is a very competitive market.

    There are also plenty of attractively-priced alternatives outside the majors.

    Maximum lending ratios are still at 75% Loan to Value (LVR) on commercial property where there are good tenants and leases in place.

    However, you will most likely have to look away from the major banks to achieve this.

    The restrictions on foreign investment lending have largely also been applied to commercial investment, so this will effect potential investors from overseas.

    In some cases, it will also spell changes for Australian citizens with overseas incomes, but should have little effect on local borrowers.

    For those with overseas incomes, funding should be still available on properties with good rental returns and lease terms.

    The Benefits?

    The benefits with commercial property investment loans are that the loan repayments are usually covered by the rental yields.

    So, outside income is not always necessary, provided the borrower has a sufficient deposit, I would recommend at least 35% for these borrowers.

    These changes have been made in response to a large spike in lending to overseas investors over the last 12 months as well concerns over fraudulent non-resident applications, in particular from China.

    Bottom Line: For local commercial property investors, it may pay to test the market as there are some very low rates available at the moment and large differences in lending ratios and pricing between banks.

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