Understanding Interest Rates
Do you have an Owner Occupier home loan? Do you have an investment property loan? Do you have both kinds of property loans? Yes? Then you have interest rates and you need to pay attention to what is happening. The reality is that interest rates are on the rise for Owner Occupiers and for Investors and more so for the Investor.
APRA, the Australia Prudential Regulatory Authority, first limited banks and other lenders in December 2014, to a 10% increase in their respective Investor loans compared to the Investor loans they each held in the previous 12 months, on a rolling month by month basis.
More recently APRA further restricted the lending of Interest Only Loans to 30% of all new residential property loans, both Owner Occupier loans and Investor loans, and disallowed Interest Only Loans altogether for any loan from 90% LVR (loan to value ratio) upwards.
Lenders had to create a way to limit the dollar value of loans to investors and now of interest only loans. These restrictions gave the lenders a good reason to increase interest rates, so that certain categories of loans were less attractive and more difficult to attain. Lenders have also increased the serviceability rate so loans are assessed at 2-2.5% higher than the actual rate of the loans already held and the loans being applied for. Previously most loans already held were assessed at the actual rate being paid at the time of application.
Before the Global Financial Crisis, Lenders increased and decreased rates in line with changes in the cash rate made by The Reserve Bank of Australia. After the Global Financial Crisis, lenders generally did not pass on the whole decrease in the cash rate set by the Reserve Bank but certainly passed on in full, any increase. In this way banks now ratchet up rates on existing borrowers’ loans so that after a time their rates are no longer effective compared to new borrowers’ loans. Lenders do not seem to have any loyalty to existing customers and the lowest rates are usually only available to new to bank borrowing.
Currently the Reserve Bank of Australia is holding the cash rate at 1.5% and allowing the banks to implement interest rate changes as they see fit to keep their loan books in line with APRA guidelines, hoping that this will be sufficient to cool the investor market.
One of the big banks has just changed 1, 2, and 3-year fixed rate loans for Owner Occupier Interest Only loans by 0.30% to 4.56%. Another increase was for 0.50%. This demonstrates the significance of some of the changes being made. Most lenders have made changes to all categories of rates.
These are some of the considerations you should be thinking about. Firstly, whether you are an Owner Occupier or an Investor find a broker who you can work with because it is getting way too complex to really get the best outcome from all the myriad of options. Arrange for them to assess your loans and make sure you are not paying more than you need to. Many brokers do not charge a brokerage so it will be free to you to get the best deal.
Each borrower is different and has different needs financially, strategically and emotionally. I personally don’t believe in paying a higher rate for an I/ O ( Interest Only) loan but there are reasons for doing so. There still may be some loans out there with the same rate for I/ O ( Interest Only) as for P& I ( Principle and Interest) but most lenders now have fixed I/ O and fixed P& I at different rates. You will almost certainly be better off paying P& I unless your current rate is already both Fixed and I/ O.
If you are an O/O (Owner Occupier) make sure you are paying O/O Rates.
Rates are moving up and down and it can be scary dealing with it all, so consider the fixed rates and maybe fix for a while, whilst this turbulence lasts. If you are O/O then you could comfortably fix for 2 or 3 years. If you are an investor think about your strategy and when you might want to sell or change your loan to further invest. I think fixing for 1 to 3 years could be prudent for an investor depending on their strategy. I have fixed mine for 2 years and 3 years because I got a great rate that would save me interest.
If you are purchasing, think about your options before paying LMI (Lenders Mortgage Insurance). LMI enables you to buy a more expensive home or better investment so it increases your options, but when prices are as high as they are currently in Sydney there is a risk of a pull-back in values. You do not want to find yourself under water (owing more that the property is worth).
Remember, with all the lenders playing around with interest rates the Reserve Bank may be able to sit pretty and leave rates on hold. They could on the other hand increase rates or there may even be a case for reducing rates believing that the lenders will successfully control the housing market increases. No one seems to agree on the likely outcome. The problem with the housing market is essentially in Sydney and Brisbane only. The rest of Australia are rather normal real estate markets, some stable and some are even falling. Just don’t pay more than you must!
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