Why Investor Interest Rates Are On The Decline
Almost 30 years ago, the volatility of the Australia property market after the “minor” crash of 1987 was a minefield for investors with a small stake to see their portfolio. Wavering interest rates and temperamental banks offered no stability to would-be investors looking to borrow and as a result the rates they were being charged was almost 0.25 of a percent higher than owner-occupiers.
Fast forward to the now, and new investors are finding themselves in a similar situation. Lending is fierce and the competition is just as cut-throat in the investor marketplace. There are new products arriving on the investment stage from new lenders competing for a very finite amount of investor interest.
Now is a good time invest. The market is gradually stabilising and Australia has for the most part weathered much of the economic storm that has raged overseas over the last decade. Lenders are offering competitive rates to first-time investors and there is plenty of money to be made for those with the patience to wait it out.
Last year, the banks began charging investors comparable interest rates to those in play 25 years ago. It cleaved the market down the middle as many investors felt the discrepancy between rates (for owner-occupier) was unreasonable.
Interestingly, banks have decreased that interest gap, and several lenders are now offering the same rates to first-time investors and new owner-occupiers. This change in fortunes for the investor only affects new applications, meaning that any existing loans taken out last year do not come under this scheme, a fact that could equate to several thousands of dollars in “extra repayments” for those who have taken out significant loans.
What the banks, the public, the politicians – in short what everybody doesn’t want, is a repeat of the housing bubble bursting with the volatility it did back in 2008. Toxic assets, as they became known, were particularly ‘infectious’ in the US market with abandoned properties simply left to rot because their owners could not afford the loans are a timely reminder of the responsibility lending institutions need to be held to account for.
While these “toxic assets” did not permeate the Australian market as heavily as the US market, it offered up a cautionary tale to Australian lenders who have taken steps to prevent a bursting of the housing bubble on our shores by capping the annual growth for property investment at 10%.
Lenders like ING Direct and AMP are offering new investors interest rates of 3.99% with 20% deposits or a requirement for ¾ of a million dollars or more (respectively)
Macquarie recently cut their three-year rate down to 4.09%.
Perhaps this is vindication that the banks are not viewing investor lending as the risky exercise they once did and these olive branch-interest rates are a means to encourage more investment from individuals and companies who play the market to prevent it from going stale.
In any case, lack of investment is what stymies a property market and the last thing the Reserve Bank wants is a sluggish downturn in the property market.
One can almost picture all the balls in the air with the juggler being the Australian property market.
The tightening of loan regulations for investors has reduced the amount of defaults, which is encouraging to banks and this has left the competition fierce among investors fighting to gain a foothold in an expanding property market that does not show any signs of slowing any time soon.
Sensibly, all new loans and investors undergo a “stress test” to ensure that in the off-chance interest rates rise to 7 percent, customers can cope with such an increase from where the current rates are. But changing the afore-mentioned standards has certainly reduced the risk of the overall lending profile.
But as the banks are starting to realise, it is not the amount of loans that are approved that is the issue, but the quality of the loans that are given out. These new systems around the checks and balances for products available to investors in 2016 seem to be on the money in terms of holding everyone accountable.