July 29, 2015
The interest rate pricing for investment loans has increased recently with a couple of Australia’s major lenders.
Why has this happened?
The prices have increased for a few reasons. Firstly, the Australian Prudential Regulation Authority (APRA) told Australia's lenders in December last year that they must curb their investment lending growth annually to 10%. This resulted in a number of Australia's lenders starting to increase their investment lending loan pricing, and they have introduced a range of policies (mostly affecting investor buyers) to limit their investment lending growth.
This has occurred because from a broader economic perspective, APRA are concerned about over-stimulating the property market, particularly in Sydney and Melbourne.
Secondly, APRA has also 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%. In simple terms, this means that banks need to borrow more to hold more reserve capital.
Major lenders including CBA, Westpac, NAB, ANZ and Macquarie are mostly affected by these changes. A 25% mortgage risk weight would increase the majors' capital requirements by approximately $12.5 billion. Lenders have been forced to raise their interest rates in order to recoup this cost. Currently, the increases have been limited only to investment loans. Investment buyers are a group that many lenders are trying to limit their exposure to anyway.
Second tier and smaller lenders are already required to maintain capital reserves at levels that are higher than these requirements. These changes therefore mean that smaller lenders will be able to compete on a more even playing-field.
For further comments and insight, read this article from the Sydney Morning Herald.
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