Un­der­stand­ing In­ter­est Rates

Hills to Hawkesbury Living Magazine - - In This Issue - by San­dra Dig­nam

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!

Go into the draw for a copy of “7 Easy Steps to Mort­gage Free­dom and Wealth Through Prop­erty” by phon­ing 96532034.

Newspapers in English

Newspapers from Australia

© PressReader. All rights reserved.