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Is borrowing to invest a good idea?

If you are wondering if borrowing to invest is a good idea, we’ll look at the apartment lending crackdown: Fact v Fiction

‘Off-the-plan apartment buyers may not be able to finance their purchases when it comes time for settlement.’

This lending crackdown could quite possibly increase this risk for off-the-plan apartment investors who may not be able to complete their purchases because they can no longer get finance from the banks.

What’s the deal?

With the recent uncertainty in the market, the banks have reacted by putting stricter lending policies to investors in place. They did this by increasing interest rates, requiring borrowers to come up with bigger deposits, and even refusing to lend money at all. In other words, they’ve made it more difficult and more expensive to get an investment loan.

What does this mean for off-the-plan apartment buyers who are borrowing to invest?

These policies could be especially bad news for off-the-plan apartment buyers. In the past, buying apartments off-the-plan has paid off for many property investors. Even though buying off-the-plan apartments has always had some level of risk. But now, this lending crackdown could quite possibly increase this risk for off-the-plan investors. Many may not be able to complete their purchases because they can no longer get financing from the banks.

Here’s how it works with off-the-plan investing: Investors agree to buy the property – at an agreed-upon price – often before construction on the building even begins. Of course, part of the risk is that you never really know what the property market is going to do while the property is being built. (You hope the value of the property goes up.) Off-the-plan investors usually put down a deposit of 10 or 20%. And it wasn’t that long ago that banks were more than willing to lend money to property investors, financing that remaining 80 or 90%.

Preapprovals that expire before settlement

However, because property buyers can’t get approved for mortgage loans until shortly before settlement of an off-the-plan property. This is because pre-approvals are generally valid for only 90 days and still have some conditions. When you are borrowing to invest, you run the risk of not being able to come up with the outstanding money when the building is complete. Particularly if the bank’s lending criteria have changed since they contracted to buy. Thanks to the new guidelines, you risk defaulting on your contract, losing your deposit, and even facing a lawsuit from the off-the-plan developers.

This could impact a lot of property investors. For these investors, it may now be a lot harder to get that outstanding 90%.

ASIC publishes a handy guide on borrowing to invest too.

If you’d like to chat about finance, please contact us.