What’s Driving The Changes?
Since the Global Financial Crisis, interest rates have been kept deliberately low. A side effect of this has been an explosion in the value of real estate, particularly in Sydney and Melbourne. So in March, APRA (the Australian Prudential Regulatory Authority), announced some big changes to the mortgage market. These changes were designed to improve the quality of loans, so that lending institutions weren’t lending too much money to the wrong people.
What Are The Changes?
It used to be that interest only (IO) loans were often the same rate in Principal and Interest (P and I) loans. So for an investor with inefficent debt (i.e. debt that did not have a tax deduction), it made sense to maximise your interest only debt on your investment properties. Not so much now.
Recently I learned at a CoreLogic presentation that the average differential between P and I loans and IO loans had now widened to 0.60%. APRA have not told them how to price the loans, but put the following restrictions on IO loans:
Overall new IO residential loans to be limited to 30% of all loans.
Within that, internal limits on loan to value ratios above 80% and even stronger on those above 90%.
They already had a limit of 10% of their overall book of IO investment loans.
Strong serviceability (in other words, can you afford to repay the loan?).
Continued restraint on high risk areas: high loan to income ratios, high loan to value (‘LVR’) ratios and loans for very long terms.
This means that banks are favouring residential loans over investment loans.
They are favouring P and I over IO.
They are favouring loans that have lower LVR’s – ideally below 80%.
One thing that many clients aren’t aware of is the scrutiny that is now being given to personal budgets. Banks now have their own serviceability calculators, and are applying interest rates of around 7.4% to the calulators to ensure that customers can meet an increase in interest rates.
What Does This Mean for Australian Residential Property and for You?
Last month we saw a fall in the Sydney property market, but a rise in the Melbourne market (Adelaide fell slightly).
So perhaps these changes are starting to impact these markets.
It also means that perhaps Australian residential property won’t do as well going forward as it has in the past (though this has been predicted before and has not happened).
It also means that we should all consider moving our loans from IO to P and I – as the rate saving now outweighs the long term tax advantage for most.
Many people may not realise how much their interest rates have risen in this environment. So it pays to talk to a mortgage broker, like the writer (I am both a mortgage broker and a financial planner), to see if things can be improved. They often can!
It definitely is a changing mortgage market, and it could change further.
Here is a link to the APRA announcement in March:
Apra’s Announcement From Marchhttp://www.apra.gov.au/MediaReleases/Pages/17_11.aspx