Its almost been two decades since banks charged a higher rate for investment property loans, but since the Australian Prudential Regulation Authority (APRA) have placed a limit on investment loans, banks have decided to hike-up their rates.
Independent of any Reserve Bank of Australia (RBA) movement, the ANZ bank and Commonwealth (CBA) have increased their standard variable rate for investment loans by 0.27 percent. The AMP Bank raised their standard rate by more than 0.40 percent last week, and its highly likely that other lenders will follow suit.
Mortgage brokers, on the other hand, see this move by the banks as being opportunistic. They are urging borrowers who are being slapped with higher interest rates, just because they have an investment loan, to search for alternatives.
After all, APRAs directive is for the banks to limit their investment lending to 10 percent growth per annum. So many brokers are asking, Why are the ANZ, CBA and AMP hitting their existing borrowers with higher rates, if APRA are only concerned with growth?
The answer to this question may lie in the percentage of investment loans that these, and other banks, have accumulated over the last 12-months. AMP Bank has grown its investor lending by 13.8 percent over the last 12-months to $2.92 billion, which is over APRAs 10 percent speed limit. The ANZ has grown its investment loans by 51.4 percent to $83.5 billion over the last year, and the CBA by 10.2 percent to $129.7 billion.
But these arent the only lenders to face this problem, the NAB recorded a 14 percent growth to $66.6 billion and the Macquarie Bank an $81.6 percent growth to $9 billion. In fact, according to the latest APRA Monthly Banking Statistics, 16 banks currently do not meet their guidelines, these are as follows:
|Bank||Investment Loans to June 2015||12-month Growth Rate|
|AMP Bank||$3.0 billion||13.8%|
|Arab Bank Australia||$148 million||25.4%|
|Defence Bank||$112 million||34.9%|
|Heritage Bank||$1.7 billion||16.4%|
|Macquarie Bank||$9.0 billion||81.6%|
|Members Equity Bank||$3.9 billion||32.0%|
|Police Bank||$151 million||14.4%|
|Police Financial Services||$207 million||19.7%|
|Police & Nurses||$695 million||25.0%|
|Teachers Mutual Bank||$758 million||26.8%|
|QT Mutual Bank||$262 million||16.4%|
Source: APRA Monthly Banking Statistics.
The banks have a number of options. Borrowers need to bear in mind that some lenders will decrease the number of investment loans that they accept, or they may follow AMPs move and no longer offer investment loans at all. Other banks will opt to raise investment loan interest rates in hope of increasing their revenue, or they may tighten up their lending criteria.
APRA have also specified that the big four banks and the Macquarie Bank make themselves resilient to any financial loss after the Financial Services Inquiry (FSI) recommended that these banks needed to be unquestionably strong. In order to this, these banks may need to increase their capital base. In the ANZs case, this means having to raise billions in additional capital, which may explain why this bank is opting to increase investor interest rates.
In order to raise their capital base, banks may even look to retain their earnings rather than paying these to shareholders. They may also sell off their business investments, which in the ANZs case, may mean off-loading Esanda Finance or some of its other minority stakes in Asian banks.
At present, APRA risk weights for home loans are at the lower end of recommendations, with FSI reporting that these rates are sitting between 25-30 percent. This is welcoming news for lenders and borrowers alike.
With the ANZ, CBA and AMP recently announcing that they have raised investment loans, eChoice an award-winning brokerage firm, who has assisted more than 30,000 Australians to find cost-effective mortgage solutions, expects the NAB and the other lenders who are over APRA guidelines to follow suit in the near future.
This, undoubtedly, will have an impact on borrowers who are seeking to start or increase their property investment portfolios, as they will be reluctant to make a commitment due to their concern with rate rise. The good news is that not all lenders will raise rates on investment loans, as not all lenders have experienced the same level of growth. This means that brokers can take advantage of this situation, and will be able to offer investors better deals that the big four banks wont be able to match.
eChoice general manager of sales and distribution, Mr Paul Liccione said that this event signifies why brokers exist. Brokers can now offer borrowers better quality outcomes for consumers in relation to the choice of their mortgage product. Plus, these brokers have greater access to a far larger selection of lending products, meaning that they can deliver even more value to borrowers as the playing field changes.
Brokers already account for more than fifty percent of mortgage system growth, said Mr Liccione, And I have no doubt this figure will increase as even more consumers choose to partner with a broker to find a more effective loan solution for their particular circumstances.
Many financial experts are suggesting that if you are seeking to secure an investment loan that you do your research and compare lenders and their products. It is also vital that you weigh up the pros and cons of the loan, and that you do your math, before you sign any contracts. This will then ensure that you get the best possible deal for your personal and financial situation.
Are you thinking of buying a home? Then contact eChoice and find the right home loan for YOU today.