September 15, 2015
Has your lender increased the interest rate on your investment loan?
Are you considering refinancing as a result? Well hold onto your horses a moment, check with your broker before you jump from the fire and into the frying pan.
In case you missed it, Australian Lenders are currently raising interest rates on investment or interest only lending. Some are also lowering maximum loan to valuation ratios, or limiting access to low interest loans to owner-occupiers, in order to meet the new Australian Prudential Regulation Authority (APRA) guidelines. August and September 2015 signals the start of the implementation of these changes in a new approach to investment lending, so if you have an investment property, you may well have been hit.
Should you take action?
It's impossible to offer a one-size-fits-all statement about how investors affected by APRA's guidelines will or should respond. What I can say with certainty is that whilst your initial reaction may be to try to punish your bank by refinancing your investment loan away to another lender, or to switch onto a fixed rate loan, now is not the time to act hastily.
Talk to your broker first.
There is some situations where it is worth taking a closer look at your options, these are outlined below:
If you took out a loan for investment purposes initially, but then moved into your property as an owner occupier later on, you may still be hit with an increase. If your loan purpose is no longer for investment and you are in this situation, then contact your broker to crunch the numbers for you, and check your options.
If you are with NAB on an interest only rate, but living in an owner occupied property, contact your broker to see a pricing concession may be available for you.
If you are constructing an owner occupied property, and are currently paying Interest only repayments, it is worth checking with your broker what your lender will be doing with your rate in this situation. Some lenders are still increasing rates on interest only loans, so you may be effected during construction.
Things to consider before you do anything:
If you are concerned you will be affected by these rate rises, then before you do anything, either contact your broker, or consider these points.
Firstly, rates are still at record lows: The major lenders have all raised their rates on investment lending by near enough to a normal RBA rate rise. Even so, your variable rate should still be well under 5%, which is still a historically very low rate. The very best thing you can do for yourself is speak with your broker.
Secondly, refinancing may not be the answer: while the bigger banks are acting now, in time, smaller lenders may be forced by APRA to follow suit, so by instinctively thinking 'refinance', you may be jumping out of the frying pan and into the fire.
For more information on refinancing, check out our blog titled ‘How to get a cheaper interest rate’.
Finally, fixing your rate may not be the answer: The fixed rates available at present are not far off the new variable rates, and if the RBA lowers the official cash rate any further, you could be paying more than you should.
For more information on whether you should fix or not, check out our blog titled ‘Should I fix my home or leave it variable?’.
Why use a Mortgage Choice Broker, what makes us different?
In situations like these where what you want to do is compare loans, products and lenders, one of the great aspects of using a Mortgage Choice broker is that we offer you this wide choice of loans, from up to 28 lenders (including the big four banks), AND we do this for you in one meeting, so no running around for you, and it is at no cost to you. Most importantly, at Mortgage Choice, the only choice that matters to us is the one that's right for you.
How is it no cost to you? Because the lenders pay us.
As a Mortgage Choice broker, we get paid the same commission no matter which home loan you choose from our wide choice of lenders. That means you can tap into our expertise at no charge, with peace of mind that we have your best interests at heart.
Take a look at our Money Chat video titled 'What makes us different' for more information.
Why the Investment loan rate changes?
Australian banks have tightened their investment loan criteria following guidelines released by APRA, the regulatory body which oversees the activities of banks, credit unions and building societies. The goal is to simmer down speculative property investment, and to help property price growth settle to more sustainable levels.
What are the APRA guidelines for Lenders:
Firstly, the new guidelines from APRA include:
- A cap on the growth of investment lending to a maximum of 10% per annum
- Tighter approval criteria for investment loans
- Firmer controls over foreign investment loans
Secondly, APRA announced that lenders using advanced internal ratings based models to determine credit risk will have to increase the average risk weight on mortgages from approximately 16% to 25%. This will result in greater capital reserve balances being held, and will bring them into line with the levels required of smaller banks.
This change predominately affects the major lenders including CBA, Westpac, NAB, ANZ, Suncorp and Macquarie. A 25% mortgage risk weight would increase the majors' capital reserve requirements (in other words, the amount of cash held in reserve for unforeseen emergencies) by approximately $12.5 billion.
How Lenders responded to these guidelines:
Lenders have responded in a variety of ways. The majority have raised interest rates on either fixed or variable investment lending. In some cases they have tweaked their loan to value ratio’s, meaning a larger deposit is required in order to purchase an investment property. One major lender has increased rates on all loans that are set to interest only repayments, whether they are investment or not.
Before you take any action with your lender directly, please contact your broker.
Or, for further information on this or any other topic, please contact your Mortgage Choice broker,
Daniel Meade on:
Phone 07 3833 9666,
If this information has been helpful to you or might be relevant to someone you know, please share it via email or on social media.
Daniel is looking forward to helping you with your home loan options today. Thanks for reading our blog.
This article is for general information purposes only and does not constitute specialist advice. It should not be relied upon for the purposes of entering into any legal or financial commitments. It has been prepared without considering your objectives, financial situation or needs. You should, before acting on the advice, consider its appropriateness to your circumstances, and specific investment advice should be obtained from a suitably qualified professional before adopting any investment strategy.