The Reserve Bank of Australia (RBA) didn’t move to increase rates last Tuesday; and, to clarify, interest rates on owner-occupied homes are likely to remain low. If you’re a Property Investor though, you’re being targeted by the banks for potentially large increases in your interest rates, on investment home loans and interest-only loans.
Some predict debt against an ‘investment property’ -- that is, a property producing a rental return -- may rise as much as 3.00% in the future.
Based on a $400,000 loan, a rate hike of 3.00% will add an extra $1,000 per month to your interest payments. Can you afford that?
But why is this happening?
It’s not only the RBA’s cash rate that plays into this; there are external economic factors as well.
Heard of the ‘Housing Affordability’ Crisis in Australia?
Whether you buy into the ‘Affordability Crisis’ or not (we don’t), the Australian Prudential Regulation Authority (APRA), the body that oversees the finance industry, continues to tighten their lending standards as a means of slowing down the property market. This has had a major impact on liquidity for Banks, leading to rising capital costs and regulatory responsibilities. Hence, rising interest rates, passing costs onto consumers.
New regulations imposed on the Banks in recent times include keeping investor-lending growth at or below 10%, in comparison to the same month from the year before. For example: in May 2016, XYZ Bank lent $10m in investment lending. The maximum the bank could lend in May 2017 would be $11m to remain compliant with the regulator’s rules.
In April this year, a further directive from APRA was imposed, whereby interest-only lending is now restricted to 30% of the total residential mortgage lending of the financial institution. This is a restrictive cap imposed on bank lending.
The real-life effect of this has seen our biggest home lender, the Commonwealth Bank of Australia (CBA), recently dropping out of the refinance market for investment lending all together and a raft of others dropping out of certain lender markets. Whilst a blunt method of dealing with these new regulations, the primary method for dealing with these restrictions has been for banks to just raise the cost of the lending to deter people from applying, so as to remain within their cap. As at today’s date though, the CBA is currently now back in the market – keep up with us – it’s a balancing act to stay within regulations.
The days have gone wherein your home loan interest rate choice was simple – fixed or variable. Many lenders now have a complex scale of rates, relevant to each of their suite of loan products, varying from:
- - Owner-Occupied – interest only;
- - Investment – principal and interest;
- - Investment – interest only
Then there are the fixed rates…
So, a question to consider when borrowing money now is, which Bank has the capacity to offer funding and when?
Now more than ever is the time to be on top of your investment debt – depending on where a particular lender is sitting with their current investment lending cap, will determine who is offering the most competitive rates.
Can you afford a 3% increase to your current interest rate? That’s where we come in – we are the negotiators in obtaining a better deal for you, to soften any future rate rises.
Please contact me, Terri Dillon, Senior Finance Consultant, on 07 3391 7055 or firstname.lastname@example.org to discuss your options, and review your current loans.