Making Sense of Recent Changes in Interest Rates for Residential Investment Loans

By Larry Hirsch | September 29, 2015 | 0 Comment

Many of you will be a little confused by the recent changes in interest rates over the past few months. Instead of going down , the interest rate on your investment property loans may have gone up.

 

Well this is why……

 

In short, the Australian Government is worried about the state of the economy (significant drop in commodity prices and the slowdown in the resources sector caused by both lower prices and the move from construction to operation of many large projects, reduction in China’s economic growth, the potential Australian housing boom bubble burst, growth in unemployment, etc) which has resulted in severe concern that  the Banking Sector will be severely affected if changes are not immediately put in place to restrict loans for residential investment purposes and to ensure that all home loan borrowers will be able to cope with any mortgage stress over the longer term.

 

Simply, the ongoing stability of the Banking Sector is paramount to the continued resilience and well-being of the Australian economy. And the customer is going to pay for it!

 

Consequently the government, through its economic agencies including APRA, ASIC, etc have placed the screws on the banking sector, principally the main deposit taking institutions (the big four banks and Macquarie) to restrict the growth in their residential investment book to no more than 10% pa, enhance their capital ratios, and improve their responsible lending practices (some of which results from the Murray Report in December 2014 – such as restrictions on SMSF Lending).

 

Lenders have all solved their requirements differently.

 

Some notable examples of these changes have been:

1.       AMP, once the most generous investment Lender, has withdrawn all new investment lending (including SMSF Lending) from 29 August 2015 and have increased its variable interest rate for existing investment loans by .47%pa from 7 September;

2.       Westpac, another generous lender, has removed all negative gearing from its serviceability calculator, and will not lend greater than 80% LVR for investment loans if not also secured by owner occupied home. Other Lenders not permitting negative gearing when over 80% LVR, or ignoring rental income for servicing, etc.;

3.       Bankwest, a leader in the 95% fully capped LMI space, has reduced investment lending to 80% LVR (although still permitting 95% plus full cap for owner occupied principle and interest loans);

4.       Most all lenders increasing their assessment rate for servicing to between 7.25% and 7.4% and requiring all loans from other financial institutions to be assessed at the assessment rate on a principle and interest basis (versus the previous regime of taking the actual payments made to the other financial institution). Very few specialist lenders and smaller banks have yet to change their practice, but it is expected to only be a matter of time;

5.       Greater verification required by customers on application for new finance of actual living expenses (removing the previous reliance on stated minimum indexes);

6.       Two tier system for owner occupiers and investors and interest only loans versus principle and interest loans. For example, ING has restricted its investment loans to 80% LVR and reduced acceptable “cash-out” to NIL on purchases and $5k on refinances. In addition, ING has reduced its owner occupied variable rate to 3.99%pa provided paid on a principle and interest basis, whilst the investment variable rate has been increased by .47%pa.

 

I have attached below a very good summary which NAB has prepared for brokers to explain the changes, which simply spells out the issues and potential consequences (including “investment lending may be harder to get”, and “refinancing and / or additional lending may not be possible”).

 

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You may also find that your loans need to be reclassified – especially if your bank is treating your loan as an investment loan whereas it is actually an owner occupied loan.

 

Some banks are unable to separate their investment loan book from their owner occupier loan book if the security properties are linked / cross collateralised, so hopefully your investment loan interest rate has not been increased by reason of your original structure at time of settlement.

 

And there is talk of another interest rate drop this year, or another two early in the new year.  However such reductions may not be passed onto the customers, because the banks may use the reduced cost to offset their increased funding costs (as outlined above), rather than pass the benefit to their customers. Definitely a period of change.

 

So it’s probably more important than ever to review your latest home loan statements and see what is happening to you, and contact us to work out what we may be able to do to provide some answers and solutions to your new circumstances.

 

Which makes this a good time to undergo your FINANCIAL HEALTH CHECK – just complete the FACT FIND and scan it back to us with a copy of your latest home loan statements, and we will review your position and work out some solutions for you.

 

Fondest,

Larry

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