If you’re involved with financial services, you quickly get used to change. However, we have not seen a change in the Australian home loan market as we are now. The changes are being brought about by pressure on banks/lenders from the regulatory body, APRA, as they try to control and manipulate housing concerns.
In the past it was simple, you had either a Standard Variable interest rate or a Fixed interest rate. Recent times have seen lenders assess Investment loans as “higher risk” and therefore allocated a higher interest rate to this type of loan. Suddenly it went from two types of interest rates to four, with a different interest rate applied for Owner Occupied properties (variable or fixed) as opposed to Investment properties (variable or fixed).
The next major change APRA brought in was the restriction of lenders to maximum annual growth of their investment loan books by 10%. This has ensured that fluctuation of investment interest rates by lenders is regular and hard to keep track of as they are forced to play “the game”. Lenders who have room to take on new investment debt are offering attractive rates, but as soon as they near the 10% mark, they need to slow or stop these types of loans to stay under the limit. Lenders do this by tightening their policies, or more commonly, by increasing their interest rates to make this type of loan unattractive and encouraging consumers to look at other lenders.
The most recent change has been regarding “interest only” loan repayments which has become a major focus. Lenders are now only allowed to hold a maximum 30% of their mortgage book with interest only repayments.
When this change was introduced, the big four banks held roughly 40% of their books with interest only which created a need for immediate action. With the majority of lenders sitting above the limit, they were forced to reduce what they already held and be cautious (or avoid) taking on any new interest only loans. So how do they do this? They make it less attractive to have an interest only loan by either increasing the interest rate to deter customers, or, they simply do not offer this option at all to new customers.
The benefits for having interest only repayments on an investment property are well known, and a lot of the time this has been the “standard option”. The main reason, it allows a lower repayment amount and also ensures that deductible debt is not reduced. This usually allows for additional cash flow to be directed elsewhere (e.g. reduction of non-deductible debt such as an owner-occupied home loan).
As a Financial Planning business, we utilise various repayment options to assist and enhance a client’s position, however this change has added another consideration: are you better off paying a higher interest rate for the benefit of interest only, or should you pay down the principal to gain access to a lower interest rate? These can be difficult questions to answer for those acting without advice.
If you would like to review your current lending, need advice on what type of repayments you should be making or you want to see how these changes affect you, please contact us.