Weird shenanigans are going on right now. Last week the RBA sent a clear message to Abbott. This week, the banks take control and send a clear message to Glenn Stevens.
Banks have started raising rates, bringing in one of the toughest credit environments in recent years and basically telling the RBA,
‘F-you! If you want to put restrictions on lending to investors and make it tough for us, then you leave us no choice… We have to do your job for you.’
The ANZ and CBA have raised rates.
And I’m pretty sure the other banks will be joining them in the next couple of days…
And so we find ourselves at a unique point in history. Very unique. The banks are raising rates while the RBA still has an easing bias.
I’m not sure when the last time that happened was.
Just to be clear, so far we’re only looking at loans to investors. ANZ led the way late last week with a 0.27% increase to variable investor mortgages, and a 0.30% increase to new fixed investor mortgages.
The CBA was quick to follow suit.
And my bet is that the other banks will be close behind. Not that they wouldn’t want to, but they also don’t really have a choice.
And as a result, we’re looking at one of the tightest credit environments in recent years.
Because these rate increases come on the back of a number of other measures aimed at making it tougher for investors to secure finance. Like Westpac’s policy a few months ago of requiring all investors to front a minimum 20% deposit.
All this is coming on the back of two big drives from APRA. The first is the directive that banks should get the growth of their investor mortgage book under 10% a year.
That call came out at the end of last year, but the banks were a bit slow coming to the party.
They’re scrambling now.
The second push was the announcement last week that APRA was increasing the required risk weighting on mortgage lending.
We also knew this was coming, and this isn’t really about slowing investor lending as it is about bringing Australian banking practices into line with world’s best practice.
And what the risk weighting means is that banks have to effectively hold more capital reserves to cover their mortgages.
Previously, banks had to hold $1.28 in their vaults for every $100 of mortgages. That’s now risen to $2 for every $100.
That may still seem like nothing (banking is a good business!), and a small change, but it’s substantial.
Think about it this way. $1.28 used to support $100 worth of mortgages. Now that same $1.28 only supports $64 worth of mortgages.
So banking just got a lot less profitable.
And so banks are passing that cost on to us. (Who saw that coming?)
And the ‘investor bubble’ is just a convenient cover story…
But we may not have seen the end of it. Some analysts are saying that banks will need to increase rates by 0.5-0.6% to offset the cost of the new capital rules.
Looks like the banks will phase it in to stop people freaking out too much.
But wait, there’s more. Seems it’s not just LVRs and interest rates. It also extends in to serviceability measures. You might now need a lot more cash-flow or cash on hand than you previously did.
For example, CBA and Westpac have reduced the weight rental income has on its loan calculations by 40 per cent, while ANZ no longer counts negative gearing towards lenders’ ability to repay their loans.
I’ve seen some modelling that shows that an investor with a $500,000 loan could be asked to hold an extra $10 – 12,000.
That is, with a loan for $500K and 20% deposit, an investor would have been expected to prove cash flow of about $8,600. That now jumps up to $21,000.
For a $1 million loan, we’re talking a jump from $14,700 to $36,870.
Have you got a spare $10-20K lying around?
And what’s been interesting is just how quietly the new regime has come in. I haven’t heard much comment in the news.
Where’s the bank bashing? Where’s the railing against our greedy overlords? Where’s Wayne Swan when you need him?
But nothing. I think the pollies know that the banks hands have been forced. APRA (i.e the government) moved first. Criticising the banks would just be criticising government policy.
And what about Glenn Stevens over at the RBA? Is he pissed at the banks stepping on his turf?
Hardly.
In fact on Wednesday, he gave them the green light. He said in a bit of Q&A about the new measures:
I imagine it will result in some rise in mortgage rates from the major banks. It is supposed to – that's the point.
So what do we make of it?
I guess you’d say that if it increases the stability of the financial sector, then that’s a good thing.
No one wants a housing bubble and no one wants a banking collapse.
But the thing about government policy is that it always tends to be behind the curve. The time for these measures would have been 18 months ago, when the current housing boom was ramping up.
But now we’ve got them kicking in at a time where it already looks like the cycle is maturing.
And there’s even the prospect of gluts building in some markets (I’ll write more about that later.)
And so rather than moderating the upswing, all this might just accelerate the downswing.
Things are moving quickly in the housing market right now. It’s a windy old road with a lot of bumps.
Maybe we’ll be sweet. Maybe we’ll sail through. But you never know. You need to watch a market like this closely.
I’m holding out of the market for now. I think these measures will help consolidate a peak in the current cycle.
I think I’ll just take a wait and see for a few months, and take stock from there. Maybe look to score some discount bargains a little further down the track.
I’ll keep you posted.
What is everyone’s take on the credit environment? Is it getting tougher on the ground?
i have an investment property , and am just making headway with the negative payments , due to cost repiars to to place , over 12 months , SHOULD i consider selling before the rise in interests rates or not , sound advice would be very good news to me on this matter , as i am in my early seventy’s , and could not afford to ad to more payments , cheers ,len
Like I said. Move your loan to a credit union and use a fixed rate for 3 years of around 3.9%
could be a bit hard , as i have it all tied up with one bank , and being on a full pension , ,dont think they would look at us , we own our own home , and have l/o c . .have any suggestions
Len, my thoughts are that you should only sell if you are going to make a
profit, otherwise continue to pay down the debt. Interest rates in Oz
are still on a downward trend, you may be able to make extra payments if
they drop further over the next 12 months. For the reasons Jon
discusses in his article, it is unlikely that you would be better off
by switching to a different financier.
Len, personally i would sell, NG is always a bad idea, even more so when you’re 70! Sell now and pick up a bargain positively geared property in a few months
thanks bill , will take your advice , thanks , i am positive to$ 300.00 p/m , so not so bad off yet ,
Yes. Just ask them and see what they say. It won’t hurt to try. But yes your circumstances do make it harder, but if you have plenty of equity it will make a big difference
can you be more specific.
Which Credit Union offer fixed rate for 3 years of around 3.9%?
Yes. The Greater Credit Union offers 4.99% for 3 years fixed (80% LVR). There are others in the ballpark like Newcastle Permanent 4.1%.
I guess time like this won’t be the end of the world but we have to be more careful with investing in property, I will be only investing where the government spends its money, still safe bets I guess.
Not very happy about interest rates going up 0.25% on my investment loans. This is an extra $7500 per year. Stuff the banks, think I might move to a credit union with fixed rates of 3.9% for 3 years. Everyone should!
Hi Steven
Could you provide the name of the credit union for the fixed rate
Yes. The Greater Credit Union offers 4.99% for 3 years fixed (80% LVR). There are others in the ballpark like Newcastle Permanent 4.1%.
I think the point is steve, you keep saying 3.99 and then when asked where, you say 4.99 or maybe another at 4.1, who specifically does 3.9% for 3 years?
Just a typo, I meant 3.99% for The Greater. Is this not low enough for you? Why so aggressive over 0.09%?
Try doing some research perhaps
what’s the best way to f**k an economy and put it in recession – let the pollies and their agencies (APRA RBA etc) have control. But because they have the security of taxpayer funded pensions and entitlements for life and NO CARE OR RESPONSIBILITY for stuff ups they really don’t give a f**k.
I hear you jota6689, and totally agree with you! They have no worries for their future income like the rest of us fools!!!! Us fools work hard buying property and managing SMSF.
Another problem is this country is welfare heavy!
Robyn, I partially disagree, what makes real estate such a sweet deal is that centrelink gives out rent assistance. All landlords have to do is convince the tenant that it is a good idea to pay the rent. Don’t act like you never sign a rent assistance form before…
“Previously, banks had to hold $1.28 in their vaults for every $100 of mortgages. That’s now risen to $2 for every $100.”
Please tell me something… If the banks only have $1.28 or $2 after this changer where does the other $98 come from to make the $100 they Loan us at Compounding Interest???
Thin Air?
Magician’s hat?
Doctor Who’s Tardis?
Is this not the biggest SCAM ever?
Can you imaging walking into your bank and saying “I’ve got $1,000,000 I’d like to put into your bank and you can pay me Compounding Interest on $50,000,000!” ???
They would tell you to take a hike. So please explain to me how this is legal? The banks are loaning money they DON’T HAVE at a compounding interest rate then to top it off they are charging fees for us using their services on money they DONT HAVE!!!
This cannot be legal and if it is then it needs to change NOW!
This is artificial manufacturing of artificial money that is NOT REAL!!!
Sorry to say but it’s just numbers on a screen NOT COLD HARD CASH OR GOLD!!!
Now they want to up their interest rates and penalise investors who are making them filthy rich!
#wakeupaustralia
dear jon,
you have it right again. i just dug up a 1983 mortgage rate chart from home building society..the rates chart offered from 12-16% reducible of course…plus charges and odds and ends. hmmm..now the ‘fed’ is gonna shake out the whole market soon…be ready. i do not know why people cannot foresee…change! everything in this world is subject to change..nothing is sacred. even politicians know this….yes they do 🙂 thats why they are gonna grab your super and make it a pension fund….don’t believe me? golly there is $2 trillion there ready for the plunder! some governments would kill for that much money(cyprus?). and the fund managers are fully supportive…the super fund will grow with only annuities coming out…no lump sums….so they will get bigger commissions cos it will get big..man big!. nice. some people think that politicions like us….dream on. they see as cannon fodder ..more population ..more taxes..more to spend. more gold passes and other goodies they vote for….ha ha. anyone for a helicopter ride? and so life goes on in the lucky country…where wages are so high that we make ourselves uncompetitive in the manufacturing and industrial sphere…and price ourselves out of owning a place to live…mining boom! we need another mining boom like we need another hole in the head. the chinese get the raw material ..madam reinholdt gets big margins and the plebs pay the price.
but the average joe doesn’t quite get the picture. thats a shame. i see them driving up the freeway..thousands of workers..one way then 8-10 hours later the other way..and then they escape at the weekends …and go back to their jobs on monday…jobs they might hate. i work from home . cheers, ron
Would someone please explain to me how increasing interest rates on established customers investment loans helps the bubble to slow down???
That really annoys me too. And no it will make no difference to supposed bubbles. The banks had to put it on existing customers because their profits are going to drop since there will be less investors taking on new loans. And the investors that buy will go to credit unions or whoever offers lower rates
Who said that?
ANZ. They are increasing mine on 10/8/2015 by .27%
No idea Jo.
The banks are already making obscenely huge profits!
And all this is not going to pull the reins in on foreign investors – it will just make things even harder for young Aussies to get their own home.
I wouldn’t be rushing for the exits or getting too negative just yet. Don’t forget these measures are only contained to interest-only lending and investor loans whilst owner-occs have had their rates reduced.
This means owner-occs can afford to pay more and when around 68% of residential property is owner-occupied this to me can only mean one thing – higher property prices moving forward, especially when the RBA is still on an easing bias.
We may see a period of consolidation over the next 12 months but the end goal is always long-term wealth and I’d expect yields to increase as rental supply is constrained. A bit of short-term pain now with slightly higher rates (albeit still less than 5%) is what usually separates the men from the boys metaphorically speaking.
Say you have a $100 000 deposit as an owner occupier; you can ‘afford’ $1 000 000 house with a 10% deposit; if they raise the deposit required to 20% you can only buy for $500 000. Higher deposit rates will affect all buyers.
Jon asked about credit; I think has tightened substantially even for those in a secure position.
Same old story; buy long term and make sure you can service the loan until the good times come again.
This will send a clear message to the government: more negative gearing subsidies will be claimed, more deficit on the budget. overall income tax rate will go higher & economy goes down.
An investment (or own home) is not just for now, it’s for the future, and that’s what you have to make plans for using the right strategy for you. Planning, Strategy, Advice, are very important, and often more important than the cheapest rate alone.
If you are worried about a 0.25% increase or more, then for peace of mind, locking in a fixed rate may be a good idea.
Note: Fix only for peace of mind. Never do it to try to beat the banks, as this is a rare thing, and seek proper financial advice before doing so.
Refinancing investments now is a whole lot harder due to increased tightening of servicing, and for many, and more each day, it’s not an option any longer and you’ll have to ride it out, but I’d recommend speaking to your broker about a personalised solution for any changes you would like to make.
For some, you have a limited time to lock in a still low fixed rate, as changes are happening every day, some give a weeks notice, others give none. If you don’t have a trusted broker, contact me
I think this is totally a beat up. MEbank are still lending, the credit unions are still lending. Foreign money is still begging to be let into australian real estate. So what if the banks want to fuck themselves up by charging over odds? Either people will pay them, and they have made their shareholders money, or they wont, and the shareholders lose out. Either way banking is going to lose to P2P and boutique funds here.
Seriously, the APRA thing is a good thing. And so all the banks are doing is trying to grab the government by the balls. Jon, horrible, what are we all doing….all for a quick dollar…..