As many of you know, we are at a very interesting place in the property market. Property values have risen strongly in many parts of Australia in recent years, especially in the capital cities and mostly in Sydney and Melbourne. The Reserve Bank has had the enviable task of trying to stimulate economic growth whilst at the same time keep a lid on a booming property market.
Apart from reducing interest rates, the Reserve Bank has very few tools it can use to stimulate what it feels is a sluggish economy and has chosen to reduce the cash rate by 50 basis points in the first half of 2015.
The hope is that these rate cuts will improve home owner’s cash flow via reduced mortgage payments, which will flow into more spending and boost economic activity in due course.
The problem the RBA has been faced with is by cutting interest rates, it is adding fuel to what is already an inferno in some parts of Australia, giving an even greater incentive for investors to borrow at historic low interest rates.
As a result, our banking sources advise that the latest rate cut came with some conditions from APRA. Effectively, the banks have been advised in no uncertain terms that they need to pull back on investment lending. APRA has reviewed the portfolios of many of the banks and determined that they are holding too many investor loans and in addition, that their servicing calculators are too lenient on investors. APRA is concerned that this current market is being fuelled by investors speculating and wants to make it harder for investors to continue to pile into an already crowded property market.
As a result, in the last few weeks, we have seen the following changes to the banks polices for loans with investment purposes. Existing loans are not impacted, only future finance submissions. It seems that all banks will be impacted by this, however, not all banks have made changes at this stage.
- Bankwest and Heritage Bank have reduced LVR’s on investor loans to a maximum of 80% LVR.
- NAB and CBA have reduced interest rate discounts for investors.
- ANZ is only offering advertised rates for investors, no discounts over and above the advertised interest rates.
- NAB has stopped offering SMSF loans for residential property.
- CBA and ANZ has removed their cash rebates for investors refinancing.
- Bank of Melbourne has changed their mortgage insurer for loans over 90%.
- Bank of Melbourne has scaled back the rent they use for serviceability for premium properties.
- Many of the banks have increased their benchmarking, meaning that the total amount a client can borrow is lower.
The positives from this is that many banks are being very aggressive in the owner occupier, principal and interest space, and are keen to win this business. As a result, it is expected that the banks will continue to offer large interest rate discounts to attract this business to their portfolios.
Keep in mind, New Zealand has already taken similar measures. Auckland’s median house price is 60 percent above its 2008 level, and house prices in Auckland have been rising rapidly since late last year. As a result, they have introduced maximum LVR of 70% for investors wanting to purchase investment properties.
