NAB lead the charge this week by increasing interest rates out of cycle with The Reserve Bank, announcing a 0.07 increase for owner occupied loans and an increase of 0.25 to all investor loans. This change affects not just new applicants, all existing clients will feel the effect of slightly higher monthly repayments.
Westpac quickly followed suit but with a much more granular approach. Owner occupiers who make repayments of principal and interest will pay 0.03 more but if they make interest only repayments the rise is 0.08. Investors were pinged even more, 0.23 for principal and interest and 0.28 for interest only based mortgages.
CBA released two changes to their investor lending policy in the last fortnight. The first was to stop accepting purely investment loan refinances, only applications that contained an owner occupied loan and property would be acceptable. The second announcement was a restriction on investor loans to borrowing no more than 90% of the property purchase price, where previously 95% was standard maximum lending. This will continue unchanged for owner occupied purchases.
These changes are as a result of two main factors. Funding costs are increasing, especially in the investor loan space due to perceived risk about the continually rising property market in Australia. The risk prices will grow to a point where they stall or fall is weighing heavily on this, the riskier end, of the lending spectrum. Changes are also further responses to the Australian Prudential Regulatory Authority insisting lenders put the brakes on investor loan growth, capping the acceleration at no more than 10% per year. The first response when lenders were asked to curb escalating growth in investment loans was an immediate rise in investment loan rates but I think the investor market is more resilient so those effects are wearing off with activity again on the rise.
Interest only loans are of particular concern to APRA and the RBA who see them as a way for a borrower to minimise the cashflow cost of a property which of couse has an inflationary effect on property prices so I expect to see even more rate rises and policy changes in the immediate future. With rates also rising in the US, investors would be wise to consider a fixed rate for some of their lending portfolio. Please don’t hesitate to get in touch if you’d like to discuss or if we can help facilitate such a change for you.