Why has my Investment Loan interest rate increased?

I’ve had many discussions with clients over the past few months about the increases to investment loan or interest only loan rates, in many cases where the increases have been substantial.

In short this has occurred because APRA, the banking regulator has placed limits on the amount of investor lender and interest only lending that the Banks can provide.

The Banks have implemented this in a few ways:

  • Tighter Lending Criteria
    Stricter assessment of applications to make it more difficult for customers to obtain finance.
  • Higher Interest Rates
    The old Demand & Supply lever – raise your rates and demand will soften. Interestingly, this has been applied to the Banks existing loans as well as new lending whereas the APRA controls relate to new lending.

The result has been marked differences between the interest rates charged for Owner Occupied lending and rates charged for Investment Loans – in some cases more than 1% difference.

So why isn’t the Government or the Reserve Bank doing something about it?

Quite simply, it’s what they want to happen. The Banks are doing some of the dirty work that the Reserve Bank (who control monetary policy) and the Federal Government (who control fiscal policy) don’t want to do.

The Reserve Bank doesn’t want to lift rates across the board because many parts of Australia are not seeing the prosperity and growth that households are enjoying in Sydney and Melbourne. Unfortunately they can’t have one policy for regional Australia and another one for the major cities.

The Government wants to be able to say that investors are paying their fair share, and that there is no need to wind back Capital Gains concessions or Negative Gearing. For them it’s political as much as economical. Perversely, the higher interest rates will only result in higher deductions against rental income and bigger tax returns for investors.

So what should I do about it?

1) Check to make sure that your Owner-Occupied Home Loan is classified as such and not classified as an investment loan. You’ll save a lot by making that change. There are other tips and techniques you can use to pay down that loan faster.

2) Check to see that any increases, top ups or variations to your loan have been priced and classified correctly. If you are unsure best to check with a Broker

3) If you are paying interest only and can afford to change it to Principal & Interest, it may be worth doing so, particularly if the loan is in relation to your main home. If the interest is not providing you with a tax deduction you should strongly consider switching to Principal repayments as well.

Finally, let a Broker have a look and see whether you have the optimal set up and rate structure across your Owner Occupied and Investment Lending. Savings are likely available. There are options available to have your investment loan priced as if it were a owner occupied loan. You just need to know where to find it.

Douglas Piening is a Mortgage and Finance Broker with Choice Home Loans and is passionate about providing advice you can trust. Whether it’s buying a home, refinancing a loan, investing, building or renovating, Doug brings a wealth of knowledge and expertise to assist with your lending needs. 

You can contact Doug at (e) douglas.piening@choicehomeloans.com.au or (m)  0408 671 524.

Want to hear what clients have said about working with Doug? Take a look at these reviews from LinkedIn and Facebook.

This information is of a general nature only and does not constitute professional advice. You should always seek professional advice in relation to your particular circumstances.

Home Loans 101: Understanding loan options

Loan options can be confusing to those new to mortgages, or sometimes even those that have had home loans for years.

Here’s a 101 to get you up to speed on loan types:

1) Basic home loans

Basic home loans or ‘no frills’ loans offer borrowers a loan with a low interest rate. This interest and principal repayment loan can be popular with first home buyers. A basic home loan’s interest rate can be half to one per cent below the standard variable rate, which is sometimes combined with minimal ongoing fees. Potential drawbacks can include limited features, less flexibility, and additional charges if you decide to switch loans or pay the loan off sooner.

2) Fixed-rate home loans

Worried about rising interest rates? A fixed-rate home loan will allow you to fix your interest rate for a specific period, usually from one to five years. It can be a sound option when interest rates are on the rise, or in times of economic uncertainty. Should interest rates plummet, however, you’ll still have to pay off your mortgage at the fixed-rate until the end of the agreed fixed-rate period. Additionally, keep in mind that you may be charged a fee commonly called a break cost or economic cost, should you decide to break your fixed term or switch to another product. You may also be limited in making extra repayments.

3) Standard variable-rate home loans

A popular mainstream choice, standard variable-rate interest and principal home loans allow you to borrow money for a set period of time, during which you make regular repayments. The interest rate can vary depending on fluctuations in the official cash rate, so it is likely to go up or down depending on the market cycle.

4) Split-rate home loans

Want the best of both worlds? A split-rate home loan offers both flexibility and security. A good product for both first time and existing borrowers, split loans allow you to customise your loan’s interest rate as you see fit: fixing a portion of your interest rate to give certainty to your monthly repayments during the fixed-rate term should rates increase, but also flexibility through taking out a variable-rate portion.

5) Interest-only home loans

Interest-only loans offer borrowers lower repayment options, while maintaining many of a traditional loan’s features. This type of loan allows you to pay only the interest component on a mortgage; it does not reduce the principal component. They are a popular choice for investors seeking good capital appreciation on their investments.

6) Low-doc home loans

If you’re self-employed, a contractor or a seasonal worker and do not have a regular income, a low-doc loan may best suit your situation.

 

Different home loan options may or may not suit you depending on your circumstances. It may also be a matter of personal choice, whether you prefer to fix in your rates for certainty, or prefer to stick with the market rate with a standard variable loan.

If you have any questions about loan types don’t hesitate to ask.

 

Want trusted advice on which loan type best suits your needs and circumstances? You can contact Doug at (e) douglas.piening@choicehomeloans.com.au or (m)  0408 671 524.

Douglas Piening is a Mortgage and Finance Broker with Choice Home Loans and is passionate about providing advice you can trust. Whether it’s buying a home, refinancing a loan, investing, building or renovating, Doug brings a wealth of knowledge and expertise to assist with your lending needs. 

Want to hear what clients have said about working with Doug? Take a look at these reviews from LinkedIn and Facebook.

This information is of a general nature only and does not constitute professional advice. You should always seek professional advice in relation to your particular circumstances.