Every first Tuesday of the month (except January) the media and social media is a-buzz with speculation. Will the Reserve Bank of Australia (RBA) cut the cash rate, increase it or leave it on hold? The cash rate influences the bank’s lending interest rates, so although the moves are usually only 0.25% up or down, this can be cause for celebration or concern for anyone with a home loan or property investment loan.
The last four interest rate movements have been down and rates are currently at all-time lows. So it is hardly surprising that investors have been very active taking advantage of the low cost of borrowing. As we keep telling our Destiny clients, there has never been a better time to invest!
However, recently, with some parts of the market regarded as over-heated, regulators have been concerned about the proportion of loans that have been taken out by investors. What will happen if there is a correction and property prices fall? Will there be a massive default on loans that could destabilise lending markets? In the past, the Reserve Bank would have increased rates to cool the market down but, in the current economic climate of low growth, they are reluctant to do this.
Investors pay the price
So, instead, the regulators have put pressure on the banks to come up with a solution and their solution has been to increase rates on their investment loans. Many investors will have negotiated discounts and rates on their investment loans – often with the one lender – only to find that they are now facing rate increases. The ANZ’s announcement was for 0.27% premium on investment loans and the Commonwealth Bank and other lenders are looking likely to introduce similar changes.
Putting this into perspective
Experienced property investors will remember that it was not so long ago that investment loans always used to attract a higher interest rate. In fact, overall it was more difficult to secure finance for property investing than for a home loan. The loan-to-valuation ratios (LVRs) were always higher too. Home-owners could borrow up to 95% with some lenders whereas investors were capped at an 80% LVR. Whether banks will apply the higher rate to new loans only, or go back and increase existing loans, will depend on individual bank policy.
Should investors be worried?
To offset the increased costs of borrowing, investors will be left with no choice but to increase rents, adding further financial burden to renters. Perhaps the regulators failed to factor this response into their thinking. The cynics among us might also see this as an opportunity for banks to increase their profits by increasing their margins on lending.
If you are concerned about how these increased rates will affect you and your borrowing capacity or serviceability, and you are a Destiny client, then talk to your Destiny property investment adviser or mortgage broker.
destinyfs 