Do you remember as a kid when you had to go somewhere boring with your parents, like furniture shopping or the post office?
Before getting out of the car your parents would turn around in their seats to face you, and in a very serous voice say … “now we’re going into this store for 15 minutes… don’t touch anything… stay next to me… and don’t hit your sister.”
It’s the same conversation my wife and I now have with our 3 young children when we go somewhere boring.
We do it because they need to be reminded on a regular basis to do the right thing. They’re good kids for the most part… but they still need to be reminded.
Our banking system in Australia works in a similar fashion. The banks and lending institutions have parents too… very strict parents actually… a governing body called APRA…the Australian Prudential Regulation Authority… that oversees all the banks, superannuation funds and insurance companies to make sure they remember their manners and do what’s right.
For the most part, the Australian banking system is in good shape, especially when compared to banking practices that led to the Great Recession over the last 10 years in the United States, Europe and the UK.
But as with the parents of young children heading into Ikea, APRA needs to remind our mostly well-behaved banks to tread carefully.
The latest “talking-to” by APRA to the banks was just last month when they required all lenders to limit the amount of Interest Only loans they approve to just 30% of volume. To put that figure into perspective, the current industry average is 37% Interest Only.
Just two years ago, Westpac was at 78% of new loans at I/O, mainly due to foreign investors.
Since then, new measures have been brought in to curb foreign investment… and we’ve since a drastic reduction over the last 12 months.
So how does this seemingly minor change to reducing the number of I/O loans impact you?
- Interest Rates for all loans has increased, but the hardest hit are I/O loans and Investment loans. These have increased by 0.20 to 0.40% and it’s likely they will go up further
- Interest Only for Owner Occupied Loans will likely be heavily restricted… and some lenders will abolish it completely
- Borrowing will become more challenging, with new rules being put in place around
As adults, the last thing we want is our parents to talk to us in that serious voice about doing the right thing... but sometimes it's good to be corrected if you head slightly off course... and don't you appreciate the fact that they care enough to say something.
As always, if you see significant changes to your rates, please give us a call for a review, happy to help.