Financial by Sandra Dignam
Over the last few months I have received phone calls from perplexed investor clients who had received letters from their lenders, indicating that the interest rates on their loans were being increased. This was not the first increase these clients had received and they were not happy. They had all heard that The Reserve Bank of Australia was leaving rates on hold - What is going on?
Some owner occupier loan rates have also increased, but it is the investor who is really being targeted. It has become apparent that banks and other lenders are creating disparity between the owner occupier loan and the investor loan. This is most obvious when looking at the rates for new loans where different rates are specified for each category.
At first the rates were increased by small amounts around 0.10% to 0.15% but the latest increases have been more like 0.22% to 0.25%. The banks are claiming that the cost of new funds has gone up but then one would assume the increases would only apply to new loans. In fact, it seems that the new loans have the best rates and the loans already settled are the loans that are targeted with heftier increases.
The banks don’t look after their existing customers!
Their job is to increase profits to the lender and their shareholders. Once the lender has secured a customer and the loan is secured, those customers’ loan rates are targeted for increases while very attractive rates are offered to new customers. When the Reserve Bank of Australia cuts interest rates, the lenders only pass on part of the cut to existing customers and in this way lenders ratchet up the rates of their existing customers’ loans.
It is so important to use a competent Finance Broker who will keep an eye on your loan, reassess it at regular intervals and suggest changes as necessary. A good broker will save you thousands of dollars and help you pay of your home loan faster and enter the investment market if that is what you desire and most of their services don’t cost you a cent. So just what is going on here? The Australian Government Representatives say they are concerned that property prices have been pushed too high and first home buyers can’t get into the market. There is concern that when the interest rates increase overall as they will, there will be those people who will not be able to afford their mortgage payments. Talk in the press proffers the belief that the property market is in a bubble and we must expect a correction sometime, and perhaps sooner rather than later. The latest discussion focuses on interest only loans where none of the principle is being paid and reliance on continued capital growth is all that keeps these borrowers financially afloat.
Discussion on various news and current affairs programs lately is on the increase and the main arguments seem to be centered around Negative Gearing and Capital Gains Tax (i.e. let’s get those middle-class citizens who are trying to get ahead), interest only repayments, and of course the property market bubble. These are the topics the political parties and the journalists are prepared to discuss. One topic they seem to avoid is the actual number of properties purchased by foreigners, i.e. citizens of other countries who are not legal residents.
All this talk but are they really concerned? I personally believe that if the political bodies in this country really cared about its citizens first and foremost, they would stop all purchases by anyone who is not a permanent resident or citizen of Australia. That is what I would like to see happen at least in the hot markets along the Eastern seaboard and all farm land. If these pollies believe Australia “needs” foreigners to buy property then let them buy in regional centers where there is not a shortage and little speculative investor demand.
I believe that Australia wide, property is not in a bubble.
Even though all I hear from the TV journalists and Government representatives is that the economy is really going well, I don’t believe that. It is hard to figure it out, isn’t it? It appears to me that Sydney and Melbourne and Canberra have rising prices while other places such as Perth and Darwin have significant declining prices. If the regulatory bodies mess with things too much how can it work Australia wide with such diverse markets?
So, this is what is happening with interest rates so far. The Reserve Bank is leaving rates on hold fearing a further drop in interest rates will further stimulate the Sydney and Melbourne markets. ASIC, the Australian Securities and Investments Commission, along with APRA, The Australian Prudential Regulatory Authority, are forcing the banks to limit lending to investors.
At the end of 2014 lenders were instructed to limit the increase of investor loans dollar vale to a maximum of 10% over their previous year’s investor loans. Some lenders stopped lending to investors for a time as they had already grown more than 10%. Others raised interest rates to limit the loans they would attract and approve. What a wind fall for the banks to increase their profit margins without the wrath of the regulatory bodies.
These measures have failed to curb investor interest in property, so APRA recently introduced a further restriction on lenders, limiting the total of interestonly loans to 30% of total new residential mortgages. As a result, many lenders introduced interest rate increases for interest only loans. For many lenders now, there are different prices for Owner Occupied interest only, owner occupied principle and interest, investor interest only and investor principle and interest as well as rates based on loan amount and LVR (loan to value ratio).
It can be quite confusing to have so many different criteria determining what interest rate will be offered to a customer. For this reason, everyone who has one or more mortgages should develop a good working relationship with a finance broker who can navigate this maze and make sure the best outcome is secured initially, and that ongoing scrutiny of rate changes ensures your interests are being protected over your borrowing life.
To have your current borrowing assessed and options outlined please call Sandra Dignam from Every Loan on 9653 2034.