Ryan Smuts: Bank funding for new-builds

In many cases, bank lending has changed considerably when it comes to new-builds, and most of these changes have happened only within the last few months.

An original advantage of funding new-builds with banks was that they are exempt from LVR rules, so banks could lend what they wanted on them. In most cases, banks would lend up to 80% for investment new-builds properties. This meant investors needed half the deposit for a new-build (20%) than they did for existing property (40%) at the time of writing. In some special cases, banks would lend even higher than this on investment new-builds (up to 90% LVR) or above 80% (up to 90%) on owner-occupied new-builds. Above 80% lending is of course subject to low equity criteria.

Where things have changed more recently, however, is as follows:

Lower Interest Rates or Higher Cashback Contributions
- As new-builds are the ‘golden child’ at the moment due to recent tax changes and our government’s aim to increase housing supply, many banks are offering more favourable interest rates (starting in the high 1%’s) and others are offering higher cash-back contributions (up to 2% of the loan amount – capped at a certain figure).
Interest Limitation Anticipation
- With the proposed interest deductibility changes, banks are looking at adopting changes to their current serviceability criteria. Assuming things move forward as planned in October 2021, in summary it will become more expensive as far as holding costs go – to own an existing rental property. This is simply due to increased taxation. As a result of having less net cash-flow, banks are adjusting how they do things. The first lender to make the change was ANZ, who have said that for investment properties that fall under the new-build criteria OR were purchased prior to the changeover date (27 March) they will (currently) use 75% of the gross-rental income – however for existing properties purchased after that date that don’t fit into new-build criteria, they will use only 65% of the gross rent.

Some of these changes are dramatic. The latter, to give you a rough idea – would mean roughly a $36k reduction in borrowing capacity per $500 per week of rent. This amount could be the difference between getting a purchase across the line with the bank. Of course, if you have a larger portfolio and this change comes into effect for existing properties purchased prior to March 27 (as it very well may over time) then this could have an even more dramatic effect on borrowing capacity.

For any specific questions on your own strategy, please get in touch at [email protected]