Interest rates on hold in April
The focus by regulators to slow down lending to investors and now also focus their attention on unsuitable interest only loans is unprecedented in my time.
What is the reasoning behind this focus?
As we have discussed over the past month APRA the government regulator is concerned about inflated property prices, primarily investment properties in areas where supply outweighs demand, the resulting exposure and risks for our banks and broader financial system.
So their strategy to combat this is to force the banks to slow down the amount of lending to investors. This is done by putting caps on how much they can lend for investment and get them to increase rates and reduce Loan to Value Ratios (LVR) on offer for investment loans.
Call me cynical but I think banks are pretty happy with how this is playing out. Banks are using the regulators rationale for wanting to slow down house prices as the basis for interest rate increases to "discourage" or at least slow down property investment.
Reality is, banks make money by lending it and if the regulator is going to slower the pace on how much they can lend, then they are going to increase their margins to ensure they don't miss out on a dollar.
While the bigger hikes are hitting investors, owner occupiers are not being missed either. The interesting thing in all of this was commentary from a well-known NAB economist. They shared that most bank investor loan books were the best performing when it came to missed payments and arrears, primarily because investors could afford it. So rates on investment loans aren't being targeted by banks to help regulators (if they really wanted to do that they would cut LVR to less than 80%), they are simply the easiest target to ensure they maintain record profits.
There are a number of other ways regulators and banks could slow down lending on investment if they wanted to have a real impact. I will talk about them next time.
Not only are investment loans a focus of APRA but also interest only loans, especially those with an LVR above 80%. Now, most investment loans are interest only so there is a bit of double up here. They are structured as interest only loans because people with home loan debt, the tax advantages (i.e negative gearing) focusing on paying off your home first, make it the sensible lending structure.
It is not only APRA getting in on the picture but also ASIC. ASIC's concerns are different from APRA's. They want to ensure that banks and brokers are not recommending interest only loans simply because people can't afford principle and interest loans. They also want to ensure that interest only loans are not being recommended to encourage loan balances to remain high, therefore allowing banks and brokers to make more money on margins and commissions made on higher loan balances.
I understand the thought process and encourage any practice focused on ensuring the right solution and advice is provided to the client, based upon their short and longer term goals.
With this in mind, there are a number of situations where an interest only loan is the right call, even for owner occupiers. I can't help but feel the government is skirting around the bigger ticket issues around negative gearing and the capital gains tax concessions for property investors.
So, if you have an interest only loan, now more than ever you need to weigh up the pros and cons associated with them. So pick up the phone and give us a call on 1300 780 440 and lets talk through the best option for you.
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