Perhaps you’ve heard about a recent crackdown on interest only lending for investors? This is because the Australian Prudential and Regulation Authority (APRA) has begun to put pressure on the banks to take measures to limit the increase of their investment loan book, after an investigation found ‘significant growth’ in this area of lending, putting it dangerously close to the 10% growth speed limit imposed by APRA earlier this year.
In response, the banks have made significant changes to lending criteria, with a particular focus on the tightening up of ‘Interest only’ repayments, a longtime friend of property investors, and restrictions on higher LVR investment lending, leaving many investors unable to purchase with anything less than a 20% deposit. There have also been investor rate increases across the board, for both variable and fixed loan products.
RIP Interest only?
In a bid to cool Australia’s charging property market, believed to be blamed on increased investor lending activity, APRA also announced that it had written to all authorised deposit-taking Institutions (i.e. banks) advising them that they were expected to ‘limit the flow of new interest-only lending to 30 per cent of total new residential mortgage lending’, and within that:
- place strict internal limits on the volume of interest-only lending at loan-to-value ratios (LVRs) above 80 per cent; and
- ensure there is strong scrutiny and justification of any instances of interest-only lending at an LVR above 90 per cent
The banks have responded with a wave of changes to interest-only and investment lending to ensure they meet the new regulations and hence, a recalibration is happening as borrowers adapt to the new lending environment, favouring principal and interest repayments.
But, is it all bad news?
Well, not really. The main behaviour that is being targeted here is borrowers who are not paying off their mortgages, which increases our nations risk rating. This in turn can decrease our credit rating as a country so as a precaution, it’s a pretty good one. Secondly, it’s played a key role in taking the heat out of the property market in Sydney and Melbourne that has been rallying with double-digit price growth, making it particularly tough for a lot of Aussie’s trying to buy in these states. The new changes have caused a controlled slowdown, which is assisting buyers to secure property in a less aggressive environment.
So, what would we do?
Our managing director, Brendan Dixon, had this to say:
"This difference in interest rates between variable and fixed are quite dramatic, with some lenders (including a few major banks) offering very cheap fixed investment rates at 3.88% for 2 years with principal and interest repayments, vs variable interest-only rates in the high 4% range and many over 5%. With this difference of over 1% it makes sense to lock in the savings and then we conduct a review in 2 years time when the fixed rate expires."
"There’s talk of interest rate increases in the next 12 months so with these factors at hand, I’d fix my investment loans."
"Also, absolutely speak to a professional. The changes that have come into effect in recent months off the back of APRA’s regulations are widespread and diverse between the lenders. As brokers, we’re able to compare over 40 different lenders and their products, so there really isn’t a better way to be across all the different options for investors."
If the recent changes to investment lending have affected you, it might be time to give us a call for a second opinion? 1300 664 603
Or, if you prefer, drop us an email: firstname.lastname@example.org