The RBA has again left interest rates on hold at the historical low of 1.50%. There has been no changes to the cash rate since August 2016.
However over the past few weeks out of cycle rate hikes by the major banks and second tier lenders have made front page headlines. These interest rate increases ranged from negligible increases to owner occupied loans to smacking investors and those whose loans feature interest only repayments with some significant increases. Bank of Melbourne stung investors 39 basis points for interest only loans, off the back of a similar increase 6 weeks ago. Three months ago the average investment interest only loan sat around 4.30% p.a. whereby now the average interest rate is verging on 5% p.a. Perhaps these increases were pre-emptive with APRA putting Australian Deposit Taking Institutions (ADTIs) on notice last Friday (31st March) to further reinforce “sound residential mortgage lending practices in an environment of heightened risks.” In addition to the APRA directive issued in December 2014 – a 10% cap on YOY growth bank’s investment loans books, APRA expects banks to:-
- Limit new interest only lending to 30% of total new residential lending – strict limits to be enforced on interest only loans with LVRs above 80% AND interest only loans with LVRs greater than 90% subject to thorough scrutiny
- Review serviceability assessments ensuring buffers are set at adequate levels for the current economic conditions
- Continue to restrict lending to higher risk segments eg. high LVR loans
We have already seen tightening in bank’s lending policies, in particular:-
- CBA reducing LVRs to max 90% for investment loans
- Macquarie Bank reducing maximum LVRs on all interest only loans (owner occ & investment) to 80%
- Bankwest significantly reducing gearing benefits for borrowers when assessing loan serviceability and therefore reducing borrowing capacity
- Non acceptance of foreign income from a raft of institutions
I anticipate over the next 3 months lending policies across all ADTIs will further tighten to cap growth for interest only loans and high LVR lends which will severally impact investors ability to borrow at competitive interest rates. In particular, most vulnerable will be those who have acquired property off plan.
On the flip side, I expect owner occupied borrowers making P&I repayments will enjoy record low interest rates for an extended period of time whilst the recent wave of out of cycle rate increases should stave off RBA increases in the very near future.
Finally, it will be interesting to see whether we continue to experience the unprecedented growth in property prices in metro Melbourne and Sydney or whether tightening of lending policies in conjunction with new under quoting laws will have the desired impact.
Of course should you have any lending questions or queries please don’t hesitate to contact me on 03 8393 1000.
Linda Hamilton, Lending & Finance Partner, Paris Financial