Time To Lend A Thought To Commercial
Are commercial loans the way ahead? Luke Jackson from Resimac explores the new options for investors.
1 March 2022
Not too long ago residential property investors wanting a home loan could drink from the same well as owner-occupiers. By utilising standard retail home loan products they could take advantage of consumer-friendly benefits such as cashback offers, minimal fees, and lower interest rates compared with products designed specifically for investors.
Alas, this may no longer be a suitable option. From December 1, 2021, changes to the legislation regulating consumer loans – the Credit Contracts and Consumer Finance Act (CCCFA) – have made it increasingly difficult for property investors to utilise retail home products.
One of the main changes to the CCCFA is that lenders now have increased obligations to review borrowers’ personal expenses. For owner-occupiers this makes sense as the mortgage payments are coming out of their personal income. But for residential property investors, their personal expenses typically aren’t relevant as rental income from the property is structured to pay off the mortgage debt and outgoings.
Nevertheless, investors wanting to use retail loan products will now be put through the wringer like owneroccupiers and will be subject to greater scrutiny over their personal expenses. Since the new legislation passed there have been numerous reports of retail home loan applicants finding it much harder to get home finance approved, with widespread tales of borrowers being declined or losing their preapprovals due to everything from too much money spent on pets and coffee through to excessive takeaway food, Netflix subscriptions and lottery tickets.
But it’s not all bad news for property investors. The CCCFA changes have made commercial loans, which assess applications based on the commercial merit of the investment property, far more attractive and advantageous for investors. It has also potentially created more opportunities for investors.
While it’s still early days since the new regulations came into effect, initial signs are pointing to reduced demand in the market from owner-occupiers due to increased bank statement scrutiny, leading to a growth in available housing stock for sale. In turn, this has started to shift the industry to be more of a buyer’s market.
Unlike retail loan products, commercial loan products don’t have any dedicated legislation that regulates how they are offered. This gives lenders more flexibility in structuring loans to suit specific investor types as well as enabling them to assess suitability of loan products based on commercial risk.
Typically, commercial loan products are slightly more expensive than their retail counterparts, and often incur larger upfront fees and a slightly higher interest rate. However, with the increased lender obligations now for retail loans, commercial loan products are often a faster and more pragmatic solution for property investors – which is particularly important for time-sensitive deals where investors need to act quickly.
The other major benefit of a commercial loan product is that they are designed to be fit-for-purpose. In other words, the loan terms and features can be structured in a way that specifically makes sense for investors, emphasising flexibility and cashflow efficiency in a way that isn’t possible or suitable for retail loan products.
Resimac’s specialist investment loan is a great example. This is a unique product that provides 20-year interestonly lending terms for up to 50% of the property value, and then 20-year debt amortisation on any amount above the 50% value. This provides property investors with a long-term loan structure that maximises cash flow efficiency of the yield.
Search For Surety
Covid-19 has had an impact on property development too. A scarcity in building materials and trade labour has led to many property developers continuing to buy sites but delaying development, and instead renting the existing dwelling out until conditions are more favourable. As such, they are increasingly looking for the surety of longer-term investor finance, which is not a space their regular development financers typically play in.
It’s a common misconception that alternative lenders are only able to provide short-term investment loan solutions. In fact, the opposite is true, with the lender able to provide residential property finance with longterm lending structures. Far from being a backup option for when the banks say “no”, such specialist investment products are often the best solution in the market for investors looking to maximise their cash flow and return on investment and make up a significant portion of the lender’s loan book.
Whether an investor is a developer looking to hold longer term, or a longerterm residential investor looking to grow their portfolio, there are also now additional cash flow considerations they will need to take into account.
Legislative changes introduced last year mean that residential property investors are now taxed on their top revenue line as opposed to the bottom net profit line. This is on top of increased Healthy Homes requirements and everincreasing landlord health and safety obligations on any property maintenance done. RBNZ LVR restrictions on purchasing existing residential stock have also largely had an impact.
These increased challenges have deterred some investors, which in turn has created increased opportunity for others. However, a greater consideration is required to ensure any investment remains cashflow positive for those looking to stay active in the market.
Historically, NZ property investors have looked to leverage their equity, raising higher levels of debt against their portfolios. Over recent years this has changed to be more cashflow-minded, with lower lending gearing on rental properties to a level where the yield can cover outgoings.
Again, commercial loans have an advantage over their retail counterparts in that they can be structured to be fit-for-purpose. Here’s a recent example of the value offered by a fit-for-purpose commercial loan:
A couple were employed as a teacher and self-employed builder. Often, being self-employed can add complication when dealing with retail bank products.
The borrowers had an existing rental property worth $893k with $535k lending against it, which was returning $530 per week in rent.
They required a further $630k to purchase another rental property for $1,050k, which was returning $675 per week.
The total loan amount of $1,165k on a standard 25-year retail home loan product generates weekly loan repayments of around $1,467. When compared to the $1,205 per week they would be receiving in rent, this is a $262 per week cashflow shortfall.
Under a specialist investment loan [from Resimac], $971k (50% LVR value) of the debt was parked as interest-only for 20 years, generating interest-only payments of $875 per week.
The remaining $194k of lending was structured over a 20-year term, generating weekly repayments of $285.
Therefore, using the specialist investment product, the weekly loan repayments are $1,160, which provides a $15.9k per annum cashflow benefit over a retail home loan structure.