As recently advertised and widely communicated, borrowers in the investment property market have recently been faced with an increase in interest rates ranging from 0.12% to 0.45% over the past few months.
In addition, some financial institutions are no longer accepting loan applications for Investment Lending on a standalone basis.
This could have resulted from concerns about some lenders breaching the Australian Prudential Regulation Authority (APRA) 10% speed limit which is calculated on a continual monthly basis.
In addition to the “suspension” of Investment Property Loans, lenders have also increased the interest rates on Interest Only loans as opposed to Principal and Interest loans.
We have also begun to see major banks adjusting their “packaged” discounts for borrowers. Previously, banks were very competitive in giving interest rate discounts of up to 1.35% for borrowers of owner- occupied and investment properties. This has now been scaled back. Investors would no longer be offered “very competitive and aggressive” interest rate discounts that an owner-occupier borrower would be offerred.
Apart from interest rate discounts, banks have dramatically fine-tuned their credit criteria for investor lending with some banks scaling back to 80% with tighter serviceability tests. Some factors regarding serviceability may include rental income reduction from 80% to 70%, not taking into account the effects of negative gearing.
Some lenders are now removing the “negative gearing” effect on their serviceability calculators.
For example, applicants who operate their investment properties at a loss (where the income of the investment property does not exceed the costs), the related taxable benefit will no longer be included in some lenders calculation for serviceability of the loan.
Finally, as the banks often review their riskier property Investment Lending Loans, these are now compelled to attract a higher capital buffer.
Therefore, with the new capital criteria requirements for banks, (as of 1st July 2016) it can be assumed that property investor loans will carry even higher interest rates (as was the case some 30 years ago).
The recent interest rate rises for property investors, coupled with strong property prices, especially in the major capital cities, may now place a question mark around the return on investment (ROI) in this category.
Tags: interest rates