Changes ahead

Banks are becoming less free and easy with their investor home loans.  They are  finally caving under the pressure of

APRA and putting the brakes on lending to housing investors, implementing tougher policies that experts expect to remove some of the heat from the booming housing market

 

Under huge public and private pressure from regulators, the big banks are implementing a raft of changes on investor loans:

  • The first measure is that most banks and lenders are raising interest rates for many new property investors by scrapping or scaling back lucrative discounts routinely offered; and putting an extra loading on investor loans making these dearer than Owner Occupier loans

 

  • The second measure is concerning the calculations of borrowers to service loan – What is commonly called ‘Maximum Borrowing Capacity’. When banks make loans to customers, they test how a borrower would fare if interest rates were to rise from today’s very low levels.

    Previously, some more friendly banks’ testing had involved assessing how investor borrowers faired with current mortgage payments on existing loans and a sensitized rate on the loan being applied for

    Now, ALL lenders will test how borrowers would cope if interest rates rose to between 7% & 7.5% on all loans.. not just on the one being applied for.  This can obviously make a huge difference on one’s borrowing capacity.

    Most banks have also introduced an interest rate “floor” under how low the rates that it uses in its borrower stress-testing can fall.   This means that even if the Reserve Bank cuts official rates even lower, all investor borrowers seeking a loan will have to convince the bank they would be able to manage if their interest rate rose to this ‘floor’ rate.

 

  • As a third measure in changes to their lending policies banks also carefully assessing other sources of information including the borrower’s credit history.  This has also been coming for a little while with Veda and other credit reporting agencies changing the way borrowing history is managed and what is recorded. The lenders have had a slow uptake of the new rules so far however in light with these reforms they will be making an effort in adopting these changes and thus keeping a closer eye on borrowers repayments history across all providers.  Those who have a bad habit in paying their bills late or in a tardy manner will be penalized as this tardiness will be recorded for all others to see… this includes home loans but also credit cards, phone bills and any other provider.

 

  • And finally, as a fourth and last measure to seal the deal, the banks have made big changes to loan-to-valuation ratios (LVR).  Indeed these LVRs have been reduced pretty much across the board to 90% for investor loans (from 95% for Owner Occupiers); and with a couple of lenders going even further reducing these to 80% Maximum.

The policy changes are a response to APRA’s warning to banks in December, that they would be forced to run larger capital buffers unless they slow investor credit growth in their loans portfolio.

There will be many different views on how welcomed these changes are and what real effect they will have. 

These changes are supposed to ensure sustainable growth in the home loan investment sector to protect both investors and the home loan market. 

And depending on the actual effect these measures have on the market, and in particular the roaring Sydney market, further changes may come to into play in the next few weeks or months.  

 

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