Interest rate rises for property investment loans are likely to increase bank profit by as much as $400 million per annum say experts. However, they also predict that first home buyers who are looking to get off the rental roundabout will be hardest hit as rents are expected to rise as a direct result.
Financial experts are suggesting that property investors should get used to paying higher interest rates than owner-occupiers. Over the last month, all of the big four banks ANZ, CBA, Westpac and NAB have increased their investor interest rates by 0.27 to 0.29 percent. These rate hikes, say the banks, are attributed to the Australian Prudential Regulation Authoritys (APRAs) changes to investment lending policy, which restricts investment lending growth to 10 percent per annum. Whereas, mortgage brokers say that the banks are being opportunistic and looking to increase their profits.
Will Investment Loan Rates Continue to Rise?
Depending on the bank investors are currently using, many investors are likely to be paying between 0.27 and 0.6 percent more in interest than owner-occupiers. This move comes after banks cut investment loan discounts and incentives to take out a new loan. These changes have created a two-tier home loan market, which existed in the 90’s.
Mortgage brokers predict that the gap between investor and owner-occupier home loans will continue to widen over the next 6 to 12 months. This, they say, will be in direct response to APRAs demand to slow investment loan growth to 10 percent per annum.
Further interest rate increases may discourage investors from taking out home loans. It will also prevent banks from being viewed as the cheapest for investor loans, which may result in a higher number of home loan applications for non-bank lenders in the future.
A number of mortgage brokers are predicting that investment loans could be raised by as much as 0.90 percent by the end 2015. But, it is highly likely that banks will reduce owner-occupier home loan interest rates in an effort to remain competitive so that their outlook for profit growth remains high. This way their investors are kept happy, especially as it is forecasted that their share prices will stagnate over the next 12 to 18 months due to policy changes.
To date, major Australian banks have already reduced fixed interest rates for owner-occupiers. Mortgage brokers are suggesting discounts of up to 0.15 percent may be offered in the future to owner-occupiers.
How Will Rate Rises Affect First Home Buyers Who Are Renting?
Increases to investment loan interest rates will add as much as $48 to monthly repayments on a $300,000 investment loan. Therefore, economists are expecting that rents will rise over the next 12 months to compensate landlords expenses, especially in areas where there is a shortage of property.
Those that are expected to be the hardest hit are renters in Sydney and Melbourne where property demand is high and rental vacancy is low. This could increase seasoned investor numbers as rising rents means higher yields. But, the down side is higher rents will also prevent more first home buyers from entering the market, as their disposable income will be reduced and they will find it harder to save their home deposit.
Many economists agree that it is not the cost of home loan repayments that are restricting first home buyers from entering the property market, but the amount needed for a home loan deposit. Rents were already at record highs in some areas and changes by APRA could add to further increase. In addition, it would be a question of how much the market could bear as to how high rents could go.
How Will Investors Be Affected By Rate Rises?
Investors who are on the top marginal tax rate will be the least affected by interest rate hikes say economists. This is due to them only paying a portion of the increased rate increase out of their own pocket. The rest theyll be able to claim in their annual tax bill via negative gearing. Some investors may even be able to claim as much as 50 percent back in tax.
However, those investors who have a positively geared property will be the hardest hit, as their profits from rental income will be reduced by increased home loan repayments. Investors who are not paying the highest tax rate are expected to also feel the change.
Overall, it will be banks who will come out on top after the latest APRA move. By adding 0.27 percent in interest to $147 billion in new investor loans that have been approved over the last 12 months to May, they will increase their revenue by $400 million.
Are you looking for an investment loan with a lower interest rate? If so, then contact eChoice. We can help you.
Written by eChoice
Since 1998, eChoice has helped more than 50,000 Australians secure a home loan through its network of over 25 lenders and hundreds of loans. Best of all our service is cost and obligation free!