Why Do Banks Charge More for Investment Home Loans??
Over the last few years we saw lenders add premiums to interest rates for Investment Home Loans and then add even higher premiums for Interest Only Loans (also once the most common repayment setting for Investment Home Loans).
Hence it’s understandable that borrowers could come to the conclusion that lenders had “gone off” Investment Loans, but that’s not quite true.
The truth is that the increases we saw to Investment Home Loan rates (compared to Owner Occupied Home Loan rates) came as a direct result of two changes imposed on the Australian banking sector by their regulator APRA.
This was initially because APRA wanted to ease the pressure on home prices in Sydney and Melbourne which they believed were over inflated and thus preventing owner occupiers, and in particular first home buyers, from entering the market ahead of investors who were cashed up with equity held in existing properties.
The first of these two changes occurred in 2015 and this change saw the amount of growth that any Bank in Australia can have in their Investment Home Loan book capped to 10% in any one given year. Considering some of the larger Banks in those days were growing their Investment Home Loans books by 20% per year this was a major change and we saw a lot of money disappear overnight from the market in terms of investors availability to access it.
The second of these two change came in 2017 and this saw the banks again capped but this time with regard to the amount of interest-only funding that they can have on their entire Home Loan book. This cap was 30% and at the time some of the banks were already in excess of 40% courtesy of not only Investment Home Loans (which were often interest only) but also the then popular Line of Credit type facilities.
This was a double whammy for investors and saw further money disappear from the market when the banks respond by:
-Increasing interest the rates on Investment Home Loans
-discrease interest rates on Owner Occupied Home Loans
-pull entirely from their product range the Line of Credit styled loans
So investors who almost invariably had interest only terms on their Investment Home Loans for tax purposes have had to transition to a balance between tax benefits and the requirement to service principal as well as interest on their Investment Loans.
We’ve since seen further Government lead incentives aimed at encouraging First Home Buyers to enter the market and it would be a brave person to bet against more to come.
So whilst the Banks still love to lend to investors, borrowers must now accept that they will be paying a little more for that same investment funding as was the case some years ago.
Accountplan’s own Mick Doyle has over 35 years in the Australian finance industry and is MFAA accredited. Feel free to call us on 07 3883 8999 and allow Mick to provide you with knowledgeable advice to suit your own circumstances.