Over the last 6-12mths we have seen dramatic movements in Home Loans rates, both up and down, and all movements have been independent of any changes to the official rates by the Reserve Bank. Why ??
It all relates to 2 major “prudential limits” imposed on the Banks by their industry regulator, APRA.
#1 – Banks can now only increase their Investment Home Loan book in a financial year by a maximum of 10%
#2 – At any one time, Interest Only Home Loans cannot represent more than 30% of a Bank’s entire Home Loan book
Why the Changes?
For some time, Federal Governments of both persuasion have grappled with ways to address the problem of housing affordability exacerbated by a large shift in the balance of residential property ownership – away from owner occupiers and toward investors.
Past measures to ease housing affordability such as the First Home Owner Grant and Stamp Duty Concessions simply saw home prices increase across the board. This largely negated the benefit of the incentives to first home buyers in the first place.
We then saw Gen X’s follow the Baby Boomers into the property market on-mass as they chased large capital gains combined with generous negative gearing tax incentives. The Banks were understandably happy to lend to these investors who by comparison were viewed as lesser risks when compared to new home buyers who were often untested as borrowers.
The ramifications have been many:
– housing affordability is now at it’s lowest on record
– the Tax paid by those in the top 40% of income earners is disproportionately lower than historical levels
– it leaves the house price market much more exposed to “major shock” should we see the start of a downturn (owner occupiers are more likely to stay put than investors are more at risk of panic selling)
How will the Changes Work?
The consequences to the banks of not meeting these prudential limits is severe – at worst a Bank could lose their license, or at minimum have heavy restrictions placed on same.
Not too long ago some Banks were seeing Investor Home Loan books increasing 21% pa as opposed to Owner Occupier Home Loan books increasing by less than half that. Such a drop in Investment Home Loan growth will see this portion of their revenue stream drop by a massive amount – and this despite them still having plenty to lend.
Unsurprisingly, we have seen the Banks look to replace this potential loss in revenue by:
– aggressively growing their Owner Occupied Home Loan books via generous rate incentives
(including some specifically offered to First Home Buyers)
– charging more for the Home Loan segments in which they are now heavily restricted
What Have we Seen?
(a) Owner Occupied Home Loan (with P&I reductions)
– variable rates have largely dropped by 12 to 30 basis points (bps)
– fixed rates have dropped by up to 60 bps
(b) Owner Occupied Home Loan (on Interest Only)
– variable rates have increased by 20-45 (bps)
– fixed rates have increased by up to 30 bps
(c) Investment Home Loan (with P&I reductions)
– variable rates have increased by 40-60 (bps)
– fixed rates have increased by up to 60 bps
(b) Investment Home Loan (on Interest Only)
– variable rates have increased by between 60-80 (bps)
– fixed rates have increased by up to 90 bps
The level of decrease or increase will generally correlate to how close each respective lender has got to their own prudential limits. For some who are uncomfortably close to their limits we have rate ranges now exceeding 1.25%.
As such it is now more prudent than ever to shop around, or, even better let us do it for you. With a Home Loan panel of 11 (and growing) Accountplan Finance Solutions is ideally placed to assist you in finding the best possible result with your own Home Loan needs.