Interest-only rate hikes have taken toll on investment lending values

Tightened restrictions around investment and interest-only lending are beginning to make an impact on investment activity, reported Banking Day.

Recent data from the Australian Bureau of Statistics showed that the value of home loan lending to investors declined by 1.5% from April to May - a $194 million drop in the investment loan market.

This was the fourth month of decline in a row, and experts are largely attributing the downward slide to APRA’s tightened regulations around “risky” lending, which includes investment, interest-only and low deposit lending. Among the regulations was the edict that lenders should stay “comfortably” below a growth cap that limits interest-only loans to 30% of new lending.

In response to these regulations, lenders have taken steps to slow the flow of interest-only and investment applications, including reducing LVRs, tightening application criteria and increasing rates. Most recently, a number of lenders including all four big banks, ING Direct and Bank of Queensland all announced rate increases across interest only home loan products.

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Sean Keane, on behalf of Credit Suisse, said APRA's macro-prudential measures and the flow on changes to bank lending practices were having a clear impact on investors.

"Investment lending now makes up just over 37% of the total dwelling commitments undertaken in May, a number which is well down on the 45% market share seen in the middle of 2015,” he wrote.

As Mozo property expert Steve Jovcevski explained, interest-only rate increases tend to hit investors the hardest.

“Generally speaking, it’s investors who take up interest-only loans, because they’ll earn the capital growth to pay off a lump sum at the end of the term. Owner-occupiers, on the other hand, are more likely to opt to pay off the principal gradually as part of the loan, so they don’t wind up with that massive cost on their hands in thirty years time,” he said.

“So it’s no surprise that a trend of hiking interest-only loan rates has had an effect on investor activity in the home loan market.”

During the month, the value of home loan lending to owner-occupiers rose by a more modest 0.4%.  Of those owner-occupier loans, the number of first home buyers rose from 13.8% in April to 14% in May.

According to Jovcevski, this is also to be expected, thanks not only to rate cuts on principal and interest loans, but also other incentives for buyers getting started in the property market.

“Lenders have been reducing rates on principal and interest loans at the same time as they’ve been hiking on interest-only lending. That’s good news for owner occupiers, and new benefits like the stamp duty exemptions in NSW and Victoria are helping first home buyers out even more,” he said.

Owner-occupiers may also have benefitted from a lack of investor activity, giving them a much-needed chance to enter an increasingly competitive market.

“Investors had their confidence shaken and backed off a little lately, so first home buyers had a chance to swoop into the market. But that won’t last forever - investment activity might be down for a while, but I predict it will bounce back again once the dust settles in a couple of months,” said Jovcevski.

Whether you’re a first homebuyer or investor, one thing you should do before taking the plunge id to compare home loans and make sure you’re getting a great deal. Head to our first home loan table or our investment loan table to check out what’s available.