Back in November, we highlighted the key differences in this article between investing in property and buying an investment property.
These key differences and the risks associated are again highlighted in a recent article published in the Australian Financial Review. (AFR)
The article highlights a group of investors who have experienced mortgage repayment increases of as much as 45% overnight due to changes made by APRA and Australian Banks.
The founder of one of the country's biggest property investment clubs says its 20,000 investors can't afford their mortgage repayments after the banks shifted them from interest-only loans to principal-and-interest mortgages earlier than they expected.
"How would you manage if your bank told you you had to pay 45 per cent more per month on your mortgage?" Kevin Young, founder of Queensland's Property Club (previously called The Investors Club) told the AFR.
Mr Young, who claims to own a portfolio of nearly 200 properties making him the country's "largest individual residential property owner", said he had been forced to sell some of his own properties due to the lending changes.
Interest-only loans typically cover a fixed period (up to five-years) and are charged at a higher interest rate, before reverting to principal-and-interest repayments for the remaining period.
According to calculations made on the Australian Securities and Investments Commission's Money Smart consumer website, a borrower taking out a $450,000 interest-only loan at a rate of 4.5 per cent over a three-year period would see their repayments rise over $1000 a month - or 59 per cent - once the loan shifted from interest-only to principal-and-interest.
Since the end of March last year, the banks and other deposit-taking institutions like building societies and credit unions have cut back heavily on interest-only lending following new guidelines set by the Australian Prudential Regulatory Authority as part of measures to de-risk and cool the housing market.
In addition to forcing borrowers to start paying off the principal amount of their home loan earlier, some banks have also been increasing rates on interest-only loans overnight, according to Walter Nanni, an associate at buyers agents Cohen Handler.
"While this is most clearly seen with specific banks, I'd expect others to follow in due course, contributing to a more challenging landscape for investors," he said.
Alongside Mr Young and his Property Club members, other prominent investors are also running into trouble due to the banks tightening up their investor lending policies. The AFR revealed last week that Sydney investor Nathan Birch was sued by his lender last year after his company defaulted on a mortgage over a Gold Coast investment property.
"APRA has done a lot of damage trying to fix a problem that did not exist," Mr Young said. He said the changes effectively meant that a typical investor could not own more than two properties and predicted more retirees would have to sell their investments and rely on the age pension.
When considering investing in property, the CFMG Land & Opportunity fund offers direct exposure to the same residential property markets without the need to take on additional debt and no exposure to regulatory changes associated with investment lending. With a minimum investment of just $25,000 investors can invest in property via the fund for fixed investment terms ranging from 18 months to 36 months paying a fixed rate of return of 12% per annum.