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Property investors caught with off-the-plan apartments delivering lower rents and capital growth than predicted at purchase need to shop around for the best rates to meet bigger repayments.
Real estate agents and developers are warning that many investors with off-the-plan apartments coming up to completion could face shortfalls of more than 20 per cent in both rental income and valuations.
"The investment lending landscape is rapidly changing," says Chris Foster-Ramsay, managing director of Capital Home Loans. "The banks are capping loan-to-value ratios to 80 per cent, increasing interest rates for investment lending and/or interest-only loans by up to 25 basis points [and some are] completely pulling out of the investment lending market."
The good news is that competition for the owner-occupier market is expected to intensify, particularly principal and interest loans.
"Those who make additional principal and interest repayments over and above the minimum required by the bank and can present a history to their lender will benefit by potentially being able to negotiate better discounts, essentially because they are lower risk," adds Foster-Ramsay.
Mortgage brokers estimate there are 90,000 apartments being constructed in Australia that have been sold off the plan but not yet settled. The purchasers of about 20 per cent of these, or 18,000, have paid a deposit of just 10 per cent of the full purchase price, according to analysis of investor statistics from CoreLogic.
As little as 10 per cent of the purchase price has been required to secure an apartment and buyers typically arrange finance ahead of settlement as the apartment nears completion – often years later.
A real-life example has been provided by Beller, a diversified property group with offices in Australia and China. The owner's name and address of the property have been withheld.
An off-the-plan apartment was purchased for $485,000 on a 10 per cent deposit ($48,500), which meant 90 per cent, or $400,000, equity was required.
The bank valuation at completion of the apartment was $400,000, a 17.5 per cent discount on the purchase price. In addition, bank borrowing has been reduced to 80 per cent of the valuation, which is 80 per cent of $400,000 ($320,000).
That means the purchaser has to come up with an extra $116,500.
The expected rent for the apartment at the time of sale was $460 a week, which is a net gross rental return of about 5 per cent on the original $485,000 purchase price.
The actual rent is $360 a week – that's a return of 3.85, which is 21 per cent discount on the original estimates.
National Australia Bank and Australia and New Zealand Banking Group have capped their loan-to-value ratios at 90 per cent.
Westpac has announced investors will be required to have a minimum of 20 per cent deposit for investment loans.
Decisions by ING and AMP to tighten, or even cease, new lending reflects their concerns about being swamped by borrowers turned away by major banks.
Barry Marshall, principal of Barry Marshall Real Estate, a boutique Melbourne-based agency, says thousands of investors who have purchased off-the-plan apartments on higher loan-to-value ratios and lower interest rates than currently on offer from the major lenders will be seeking alternatives.
"Investors have to get the money from somewhere," Marshall adds.
Investors facing a funding squeeze on an off-the-plan property in their self-managed superannuation fund need to clear several more hurdles created by contribution caps and legal restrictions on their trust.
A super fund trustee has entered a legal contract with the seller that is fully enforceable. A trustee cannot walk away from the agreement without serious legal repercussions.
"You can top up any shortfalls with super contributions to your concessional cap or non-concessional caps," says Aaron Dunn, managing director of The SMSF Academy.
But if the concessional contributions cap are exceeded these amounts may be subject to excess contributions tax or refunded and reassessed by the Australian Taxation Office to include the amount within your personal tax returns, along with an interest charge, he says.
Some lawyers suggest a new contract outside of the fund.
"I have seen circumstances where the vendor will allow for a new contract to be drawn up," says Dunn. "In such an instance, you would expect the original deposit to refunded and the new purchaser pay a deposit the new deal," he says.
Those considering this need expert legal and tax guidance to ensure it does not create contract and tax problems.
Other options might be to seek a top-up loan for the shortfall from a related party, such as another member of the fund.
"This can create potential problems in the ranking of the mortgage if there is a default or bankruptcy," says Dunn. "The related party will rank behind the bank in the event of default."
There will also be additional costs in drawing up a related-party loan agreement.