As you might have heard over the past few weeks in the news, banks & lenders are tightening guidelines for lending to housing investors, either by increasing interest rate for investment and interest only loans, and also by making it harder for investment loans to be obtained.
This was what Australia Prudential Regulation Authority (APRA) had proposed to the banks/lenders in last December. In simple terms, APRA was worried about the increase high level of household debt, due to inflated property prices and low interest rates.
So why is APRA worried? Let me try to explain it in a way that is easily understood.
High property growth but low income growth
Property in Australia, especially in Sydney has seen exponential growth over the 2 years. But in the same period of time, household income has seen minimal growth. Properties are becoming unaffordable to many in the last 2 years and will be worse in the future.
Historically low interest rates
A low interest rate encourages potential home buyers and especially investors to get into the property market. This will increase the demand for properties and thus pushing up the prices of the properties. All is good at current times, but when interest rate starts moving in the opposite direction, many of the borrowers will start facing financial difficulties. Many might face difficulties in meeting loan repayment obligations.
What did APRA proposed to the banks?
Maintaining growth in investment lending
APRA has set out a maximum of 10% growth threshold for all lenders. This meant that if a bank had settled $100 million in investment loans in 2014, then they have to ensure that their investment loans don’t exceed $110 million in 2015. Most lenders had reached or are close to reaching that threshold; therefore, they are making their investment loan unfavourable to potential borrowers.
More prudent lending
1. Banks have adopted a tougher stance on higher risk mortgage lending products (includes investment loans, interest only loans, etc), by passing higher interest rates for these loan types.
2. Banks have adopted a lower loan to value ratio (LVR) on investment loans.
3. Banks have adopted a higher base rate and additional interest buffer when assessing the serviceability.
APRA sees this for the good of the economy and also enforcing good lending practices with the banks and lenders. If you have any questions regarding your loan, please do not hesitate to contact Australia Finance House directly.
