Polishing the image

Warm and fuzzy. That seems to be the new strategy of Australia’s big banks as they try to win back respect from customers scarred by scandals and unpleasant fees and charges

THEY removed ATM fees last month, and now interest rate on credit cards have been slashed.

Some bank watchers expect more customerfriendly moves to try to improve their image, but these changes will cost banks millions, so you must wonder where the money is coming from.

If you’re one of Australia’s two million-plus real estate investors or have an interest-only mortgage, all you need to do is look in a mirror.

Just over two years ago investment loans carried almost the same interest rates as owner occupier mortgages. Then regulator APRA announced it wanted to curb lending growth, so the banks eagerly lifted their investment loan rates from August 2015.

Since then they’ve been lifting, lifting, lifting, to the point where common investment loan interest rates are a full percentage point higher than owner occupier rates. The rises have been on two fronts: rates on all investment loans are up, and there have separate increases for interest only loans, which are a favourite of investors because of their tax benefits and also are used by owner-occupiers.

It’s hard to say how much extra money investors are paying as every loan and lender is different.

If we assume each property investor has just one $350,000 loan, we’re talking about almost $20 billion more every year pouring into banks and other lenders compared with two years ago.

Interest only loans make sense for investors who have mortgages on their own homes and other personal debt. That’s because investment debt allows tax deductions on interest payments, and investors save money by getting rid of all nondeductible debt before they start paying off investment debt.

Some people say property investors can save money now by switching from interest only to principal and interest loans, but the numbers don’t yet stack up to support this. A $350,000 principal and interest investment loan is still about $400 a month more expensive than an interest only mortgage based on current rates. Investors get some of that extra cost back through their tax deduction, but they’re still out of pocket.

However, for some the higher cost may be offset by the fact they’re actually paying off debt. This can make them feel warm and fuzzy. Just like what the banks are trying to do with their money.