There has been a fair amount of press on APRA (the regulator that oversees the banks) and investment lending recently so I thought I’d do a quick feature to bring everyone up to date, let you know what the changes are and what it ultimately means for you as a property owner.
So what happened?
In December last year APRA got all of the big banks together and said they didn’t want to see the banks property investor loans growing at more than 10% PA because they thought it would distort the market in years to come and could lead to a crash once rates started tracking up from their current historical lows.
The banks didn’t take a lot of notice and kept lending as they were, growing above the threshold (as can be seen below) and in May reminding the banks to slow down, otherwise they would force the banks to hold extra capital against investment loans – or put simply, it would cost the banks more to lend out money for investors which would hit their profits.
APRA said enough was enough and told the banks earlier this month that they had to hold twice the amount of capital against their home loans, which impacts their profits and your rates.
The major banks have effectively been allowed to discount the size of a home loan because they have demonstrated they are advanced in managing risk when calculating how much equity they must allocate to a loan – What this means is at an average risk weight of 16 percent on a $1 million loan, they’ve been allowed to count the loan exposure as just $160,000 and must hold 8 percent of capital against that amount (or $12,800).
NOW, the change in the risk weight to 25 percent and the increased capital requirement to 10 percent means that in the hypothetical $1 million loan example, the bank will have to hold $25,000 against a $1 million loan, almost double the initial amount.
Why does this mean my home loan rates have gone up?
Well, if the bank must now use twice as much equity to fund the loan, it can only make half the profit per dollar of equity. Put another way, for every $25,000 of equity the bank raises from shareholders it can now lend and earn interest on only $1 million compared to $1.9 million previously.
And so what does this mean for me?
Time to look around. Both CBA and ANZ have said they will be raising variable rates for investors (both new and existing) by 0.27% in the next few weeks, and NAB have just announced they will be increasing interest rates on interest-only loans (for both owner occupied and investment loans) by 0.29% and several analysts have said they expect Westpac to follow suit.
More than ever it is important for you as a property owner to ensure your portfolio is structured in a way to hedge yourself from individual bank policy changes so speak with a broker at Red & Co to discuss your situation to make sure you do not get caught out with any further changes in the short to medium term.