A couple of years ago we were in the golden age of borrowing and investing. Interest rates were at record lows and as an investor you could have as many properties as you liked on interest only loans with these ridiculous interest rates. Have you noticed the interest rate landscape is changing?
Slowly but surely there have been some incremental changes over the past 12 months that have seen the property landscape change for both investors and home owners. So what are the changes and how are they going to affect you?
Right now with interest rates being low, property prices are going through the roof in the Eastern Seaboard capital cities. In February the Australian Prudential and Regulation Authority (APRA) issued a stern warning to the banks about the accelerating growth in the property investment lending. APRA communicated to lenders a benchmark of 10 percent growth in investor lending annually. APRA also demanded new interest-only loans represent no more than 30% of new residential mortgages. This has caused many of the banks to tighten their assessment of borrowers’ eligibility for investment home loans including Loan to Value Ratio’s or LVR’s.
Many banks have also increased their interest rate for interest only investment loans, putting just that little bit more pressure on investors. Many of the banks, including Commonwealth decided to put a hold on new investor refinancing applications, particularly through intermediaries.
For example at the end of June ,AMP announced that they will increase investment property loans by 35 basis points. But more interestingly for new investor property loans, AMP’s maximum LVR will be reduced to 50%. This also includes loans to self-managed super funds (SMSF). Is this an indication of the banks predictions of future property values?
The issue appears to be that the banks are concerned with the interest only loans. If investors are purchasing properties at what seems to be inflated prices, and not paying down the principle loan both the investor and the bank are over exposed if there is a major economic shock causing correction in the property market. BankWest have increased interest rates by 34 basis points for both interest only loans for investors and owner-occupiers. On the other hand, investors paying both principal and interest they have reduced rates by 30 basis points provided their deposit was greater than 10%.
So investors are not the only one in the firing line. ANZ and Westpac have also had a clampdown on interest-only deals for owner-occupiers. Previously the LVR accepted by ANZ for an interest only owner occupier loan was 95%, however, the maximum LVR now will be 90%. This puts even greater pressure on first home buyers to find an extra 5% deposit, which in this environment of increasing house prices can cost them more every week that they are looking for a home.
The push from by APRA and the banks is in an effort to get Aussie home owners and investors to pay down their loans. Providing that they can afford to do this in the short term, it does put them in a much better position long term. It means that over time they will pay less interest for their home and allow them to become more financially independent in the future. With volatile home values in the future it also means that highly leveraged home owners can reduce their LVR which will protect them in the future of owing more on their home than it is worth in that current market.
With the changes to lending for investors, speak with our Lending Team at Azure Group Wealth if you need to address any of your finance needs.