For the eighth month in a row the RBA have decided to keep the Official Cash Rate on hold. That’s continuing good news for Australians in general and allows further reductions of debt to be made. So far no announcements have been made by any Lenders about their intentions.
Given that most of them have already increased their interest rates for Investors and Owner Occupiers prior to the RBA decision, it’s not unusual. However, there has been a major announcement by APRA, which will have a dramatic impact on Investors.
APRA has announced a raft of measures aimed at slowing down the market.
This time, rather than target Investors directly they are limiting their interference to the products that Investors prefer, Interest Only loans.
APRA have imposed a limit on Banks that require them to keep the flow of new interest only lending to 30% of the total amount of new residential lending. They have also targeted Interest Only loans that have a Loan to Valuation Ratio (LVR) greater than 80%. Further to that there are requirements for strong scrutiny and justification for any instance of Interest Only loans over 90%. On top of all this they are still under orders to keep investors under the existing 10% limit for growth.
APRA have specified that serviceability metrics, including interest rate and net income buffers found in capacity calculators should be set at appropriate levels for the current conditions. Finally APRA expects that Banks will continue to restrain lending growth in higher risk segments including high LVR, long term loans and high loan to income loans.
How does this affect you?
Well, it’s clear the Lenders have been put on notice that they are expected to reduce the number of I/O loans being approved. As the majority of these will be for Investors things may get interesting. However, it may not be as bleak as it seems. Investors have very strong justification for having interest Only loans on their Investment property but it seems like the regulator is intent on targeting loans that perhaps should not be on Interest Only.
These measures are designed for Interest Only lending, not Principle and Interest Home Loan borrowing so Owner Occupiers and First Home Buyers should feel relieved.
The Banks response to this new demand from APRA will be fascinating. I foresee a tightening of lending criteria by the Banks on the one hand and an opportunity for non-Banks to make inroads into the market on the other. One thing is certain though, the Banks will take this opportunity to raise interest rates for everybody, not just new lending. They have done it before.
You can take that to the Bank.
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