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) email@example.com or (m) 0408 671 524.
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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.