SNEAKY property investors are getting around strict new lending rules imposed by the banks by masquerading as owner-occupiers to get lower interest rates.
Insiders have revealed a clampdown on loans to investors ordered by Australia’s banking regulator is being subverted by wealthy investors who falsely claim they plan to live in properties when they are actually buying to rent out.
The big banks are offering lower interest rates to borrowers who want to own the roof over their heads after being ordered by the Australian Prudential Regulation Authority (APRA) to reduce the proportion of loans going to investors.
This gives owner-occupiers a better chance at breaking into the highly competitive and expensive property market.
It is unknown how many investors are falsely claiming to be buying for themselves, but the practice could impact the stability of Australia’s property market by sabotaging the new rules, which aim to averting a dramatic fall property prices that could spark a GFC-style meltdown.
But the temptation to rort the system has proven too great for some, according to several high profile insiders who spoke to news.com.au on condition of anonymity.
Mortgage Choice spokeswoman Jessica Darnbrough agreed to speak on the record about the practice, which she confirmed had become a talking point in the industry.
Ms Darnbrough said accessing the loophole – which the company does not endorse – could be as easy as having mail redirected from the loan property’s address, a tactic employed in the past to access the first homebuyer grant.
‘It’s not something our brokers would engage in, but I have heard that it is happening,’ Ms Darnbrough said.
‘There are a lot of grey areas in lending … And with interest rates as much as 40 basis points higher for investors, I can see the reason behind it.’
The likeliest offenders are understood to be wealthy investors buying rental properties in their own state, making it easy to fudge their living circumstances.
Investors must have strong enough cashflow to convince the bank they can pay off the loan without renting the property out – even if this is what they plan to do.
THE MOVE TO CLAMP DOWN ON INVESTMENT LOANS
Investment mortgages are considered to carry a higher risk of default, so APRA has required banks to cap the growth of lending to investors at 10 per cent by the end of this year.
The measure was announced amid concerns of a speculative property bubble in Sydney and Melbourne, where investors have piled into the market.
It aims to prevent the housing market from becoming dangerously overheated, as high investor activity can have the effect of inflating prices.
Regulators want to stop problems in the housing market affecting the rest of the financial system, as happened during the global financial crisis.
When assessing a loan application, lenders require borrowers to provide proof of residence such as a drivers licence, pay slip or utility bill.
But news.com.au has been told that there are several ways of getting around this, such as redirecting mail, or striking an agreement with tenants for mail to be collected at the property.
Ms Darnbrough said that while interest only loans were once a red flag, this was no longer the case.’These days, a lot of borrowers opt for interest only loans, especially when they have just bought their first home and are giving themselves some time to get used to making mortgage repayments.’
SNEAKY TACTICS ARE ‘INEVITABLE’
Oasis Property chief executive Gavin McPherson said it was inevitable that some investors would claim to be owner occupiers, as the new regime was not ‘an incremental or mild change’ for many borrowers.
‘For some investors, it is the difference between investing or not investing,’ Mr McPherson said.
‘With stock markets volatile and bank deposits paying so little, I see it as inevitable that some investors will look to call themselves owner occupiers to realise these investments.’
He said banks and brokers would be alert to inconsistencies, such as when properties were purchased interstate – but ‘they will always be reliant on the applicant making truthful statements in the application’.
Ultimately, he advised against the approach, warning that anyone who needed to lie on a loan application was ‘probably not ready to invest’.
‘If an investor doesn’t have a full deposit in cash or equity, then maybe they should sit this cycle out,’ he said.
‘Their time will come, and my money is on more price downside than upside in NSW and Victoria in the near to medium term.’
TAKING THE STEAM OUT OF THE MARKET
Westpac chief economist Bill Evans this week spoke out against APRA’s clampdown, arguing that it could jeopardise the settlement of new off-the-plan apartment sales.
Mr Evans warned the tightened lending rules could create a ‘distortion’ by artificially cooling the market, in comments made at a construction industry breakfast and reported by the Australian Financial Review.
Whether this is a good or bad thing largely depends on which side of the property ownership fence you are on; for would-be first home buyers, arresting the growth of house prices could be a godsend.
Pair that with lower interest rates and perks like free airfares, and you’re onto a winner.
The prospect of investors crashing this little party, by effectively stealing a spot among the banks’ new target customer base, does not sit well.
On the other side of the equation are the investors who have bought off the plan and find themselves unable to settle.
BANKS REACT TO APRA’S NEW REGULATION
The banks have chosen different approaches to dealing with the crackdown, with NAB opting to hike interest rates on interest-only loans, which are often – but not exclusively – used by investors.
The Commonwealth Bank, ANZ, Westpac and Suncorp raised interest rates for investors, while HSBC banned loans to investors who are not existing customers.
Non-bank lenders such as credit unions do not have to comply with the regulation.
In August, NAB revised its loan books for the 2014-15 financial year by almost $30 billion, informing APRA that there were 40 per cent more investor loans than previously reported – meaning they had been incorrectly classified.
Misclassification includes the scenario of a first homebuyer who does not declare the fact that they are planning to put tenants in the property, or where they initially live in the property but move out after a period of time and rent it out.
Equally, borrowers who have moved into homes they initially bought an investment – but had not bothered to tell their lender – have been contacting banks to change their status after being hit with higher interest rates.
Reserve Bank governor Glenn Stevens has noted that APRA’s new rules appear to have slowed the growth in lending to investors; it grew by 10.7 per cent in the year to August, down from 10.8 per cent in July.
Only time will tell whether the banks manage to get this down to 10 per cent – on paper and to the best of their knowledge – or face potential fines.
TRUE EXTENT OF DISHONESTY UNKNOWN
When contacted by news.com.au, all four of the big banks declined to reveal whether they had knocked back any loan applications by investors posing as owner occupiers, nor would they detail their verification processes.
Westpac spokeswoman Fiona Macrae said in a statement that the bank had ‘appropriate checks and balances in place to ensure customers’ loan profiles are accurate’, but would not give further detail.
‘We are seeing an increase in the number of customers re-categorising their loans – this increase is industry wide,’ the statement said.
‘Westpac is proactively seeking out customers in order for them to update their records, as you would expected after such a change in policy.’
A spokeswoman for NAB said the bank had not seen evidence of’ a change in the proportion of loans that have switched loan purpose between investor and owner occupier’.
‘We operate in a highly regulated market and take our lending obligations very seriously,’ the spokeswoman said.
‘Under national consumer protection legislation, we are required to thoroughly assess a customer’s financial situation and needs to ensure that we are providing suitable products and solutions.’
ANZ, the Commonwealth Bank and HSBC declined to comment.