What do changes to investment property loans mean for you?

The game has changed for property investors, but this provides a rare opportunity for owner occupiers to slash years off their mortgage, writes Andrew Pribil.

What has changed?

As the Australian real estate market continues its exponential rise, the industry’s regulators have set their sights on banks’ lending activity, with the Australian Prudential Regulatory Authority (APRA) setting a ceiling for annual growth of 10% in lending to property investors. To put this in perspective, growth to investors has been approaching 20%, with banks needing to heavily apply the brakes in order to adhere to the new requirements.

Why has this occurred?

The main concern from the regulators is the number of investment property loans that have interest only repayments applied, where borrowers don’t repay any principal to maximise the associated tax benefits. This leaves the market exposed if there are any increases to either interest rates or unemployment, as sufficient equity hasn’t been established if the property needs to be sold.

APRA is looking to be proactive so we avoid a market situation where borrowers are unable to meet their repayments due to unemployment or increased rates, but hold a mortgage that’s greater than the sale price of the property – a situation that is referred to as negative equity. This would put significant pressure on house prices and result in many borrowers holding a debt following the sale of their property; inevitably increasing the number of bankruptcies across the country.

How have banks responded?

The main lever banks have to slow lending is always interest rates, with differentiated pricing being implemented across the market. Rate rises have been applied for both existing and new investment property loans (as well as interest only loans in most instances), with many banks also limiting the loan to value ratio (LVR) offered for any loans with the purpose of investment. The most drastic action was taken by AMP’s banking arm, completely withdrawing their investment lending products. This has had an immediate impact, with APRA noting a moderation in the upward trajectory of application volumes for new credit throughout June and July.

What opportunities exist for consumers?

Thankfully, there is an upside to these changes, with banks looking to make offers for owner occupiers more attractive. APRA’s intention is not to stop lending growth, rather ensure any money lent is done so prudently. As a result, banks across the board have improved their rates for owner occupied mortgages. Variable rates as low as 4.09% (with an offset facility attached) are available, regardless of total lending volumes, making it as good a time as we’ve seen to review the current terms on your mortgage.

There are also significant opportunities for investors. Whilst rates have increased, each bank has made an independent decision on how they can remain within the 10% growth target. It is highly recommended during this period of significant change that everyone reviews their financial terms, as the disparity between what banks are offering has never been greater.

Summary

Whilst the conditions for Australian property owners have markedly changed, it makes it even more critical that clients are aware of how they sit against current offers available in the market. As my previous blog post on how banks price their mortgage book highlights, banks hope that clients sit on their current deal, as this is where margins are at their highest. Owner occupiers are able to slash years off their mortgage by capitalising on this unique market dynamic, but it is equally sensible for investors to ensure they are not being unfairly penalised.

If you have any questions, or would like to have your current terms reviewed, feel free to call me on 0402 087 478, or email andrewp@acfg.com.au