It won’t come as a shock when I tell you that Interest Only (I/O) Loans are a contentious issue at the moment. Most Lenders are increasing rates for these loans while at the same time encouraging customers to convert to Principle and Interest. (P & I)
Borrowers all over Australia have the right to question why this is happening.
Every time I read a Bank press release I end up with a wry grin. I really enjoy the stories they put forward outlining why the increased interest rates are needed. It’s easy to blame the Regulator but increasing interest rates for loans already settled does not meet APRAs stated intention of slowing down NEW borrowing.
Is this a ploy then? Well, that’s an interesting thought.
Considering that these increases are also explained in terms that attempt to show how being charged more is good for the borrower, I’m firmly in the “maybe it is” camp. Banks have priced P & I loans lower to lure unsuspecting people into changing their loan repayments but these changes can unwittingly upset strategies that have been in place for years.
As well as the changes to Interest rates, some Lenders are also introducing lower Loan to Value Ratio (LVRs) as well.
It seems we are moving into a narrow LVR environment with Investment loans being restricted to 80% LVR maximums. This is a big change. We have even seen Lenders slash LVR’s to 50% in some cases and SMSF’s have also been hit with similar measures. In my experience, Policy changes like these are designed to drive business away which suggests to me that some Lenders may be very close to the mandated limit set by APRA. To be honest, I prefer this result rather than a Lender simply pulling the plug and withdrawing from the market. Having said that, at Investors Direct, we still have access to loans needing 90% LVRs.
So where does that leave us?
The major Banks are clearly not interested in funding Investment property loans to the degree that the market has been used to. We can argue all day long whether they are at the mercy of the Regulator or they are just being opportunistic by raising rates for almost every single borrower in Australia. The good news is that other, smaller Lenders most definitely are interested in gaining their share of the Investment loan market. So if the major Banks are showing little interest I believe it’s time to turn to the non-Banks segment and reward them with investment loan business.
Smaller Lenders and Non-Banks supply competitive products for a wider variety of situations and are responding to the current situation in a positive manner. Often they will accept conditions which the major Banks won’t look at. They are price competitive on most products and generally do not require special discounts to improve their positioning. In fact, it’s the Banks that do the special discounting to compete with the smaller lenders. Most of the time smaller lenders have the ability to move quickly so short settlements can be directed to them.
From our point of view smaller lenders have other intangible advantages that borrowers seldom need to think about. For example Non-Banks can supply a superior service level to Mortgage Brokers by providing direct access to credit managers and assessors. This is important if there are questions about an application.
It’s obvious that Interest Rates are rising and there are two different points of view as to the reason this is happening. On the one hand Banks are saying that increases to interest rates are cost driven. Their cost of funds have increased so they are being forced to follow suit and you, the consumer, have to pay.
Is it just a coincidence that these rate increases come just before the Bank levy is due? I’ll leave that up to you to think about.
Clearly, if you want to get off the interest rate spiral you can convert to P & I, which is not necessarily a bad thing. However, the issue to consider is that while the rate will drop, the repayment will increase. The actual cost to your cash flow, as distinct from the actual interest rate, may well be higher, so consider carefully before you decide.
While all this change and confusion is going on we still have lenders who want to lend. Navigating through the maze of conflicting requirements and knowing which Lenders will suit your circumstances is what we do best.
With over 15 years’ experience as a specialist investor finance business, it makes sense to come and see us before you do anything else.
To find out about how the Investors Direct Mortgage Solutions team can help you: