Thursday, 30 July 2015

Why did investment loan interest rates just rise?

Recently I wrote about how this was the golden age for mortgages, how the current rate environment couldn't last and how you should think about refinancing your home loan to save you thousands of dollars.  I thought interest rates would increase at some point but I certainly didn't predict it would happen this fast.

If you're an Australian investor you may (or may not) have noticed that the interest rates on your mortgage jumped significantly last week.  That's because most of the major banks (led by ANZ and CBA) increased their investor loan variable interest rates by 0.27%.

Unlike most rate rises and falls this was not driven by a change in the Reserve Bank's cash rate nor was it driven by external costs of funding.  It was caused by the financial regulator (APRA) deciding to slow down the growth in lending to investors which have been driving a bubble in Australia.

Who does the rate change affect?

The rate change affects you if your loan is classified as an investor loan on your banks books.  If you're loan is classified in correctly (as mine is as I just moved into my investment property as an owner occupier) then you really need to refinance your loan or get the status of your loan changed.

If you are an owner occupier this change makes no difference to you at all.  In fact you are probably a little bit better off as the banks compete even harder for your business.  When I get it all settled I'll describe the fun I've had refinancing my loan (I can't believe the discount I got).

Note that NAB is the exception to this rule.  NAB's systems are such that they cannot just raise the interest rate on investor loans while keeping owner occupier loans constant.  They made the assumption that most investors actually have interest only loans and so increased the interest rates on these loans while leaving principal and interest loans the same.

Is there more to come?

Honestly because it is regulatory driven it is hard to say.  APRA has been making comments about lending growth to investors for some time.  This is the first time that any bank has changed it's lending policies as a result of instructions from APRA.

Further if you look at the new bank capital rules coming into play it looks like the change will be structural and permanent.  Investors will no longer be able to borrow at the same rates as owner occupiers because banks will be required to hold more capital against these loans.

One change that may also come in the future is the possibility that banks will start charging for offset accounts.  This has not yet been mentioned by any bank or in the press however the new capital rules mean that this could be a reality in the future.

So what should you do?

Getting stung with a price hike never feels good.  It may make you feel marginally better to realise that everyone is in the same boat as you (although the fact that owner occupiers still get great deals has to burn a little).  

There isn't much you can do about the price hikes if you want to stay at one of the major banks.  The regional banks (Bank of Queensland and Bendigo Bank) are not as badly hurt by the capital changes as the majors are and their investor growth has been far more muted so you may want to consider them if you are considering refinancing your loan (note this is true as at the time of writing but may change into the future).

There may be some scope for you to game NAB's systems a little.  If you are an owner occupier with an interest only loan at NAB (like I was) then you need to move it right now.  You are getting screwed when you really shouldn't be.  If you are an investor with a principal and interest loan perhaps NAB is a place you should think about moving your loan (although at some point they could bring their lending practice into line with the other major banks).

If you've been sitting on your loan for a few years and haven't done anything about it then this is definitely the time to start thinking about refinancing it.

You May Also Be Interested In:
Why I gave up my Investment Property and moved into it as my own home
Refinancing your mortgage could save you thousands
What is a normal home loan interest rate?
Real Estate: All Posts


  1. Hmm yes it's interesting times, wouldn't be too concerned, if anything I'd say it's a good thing! Rather than sit on the sidelines and do nothing regulators are stepping in, not sure I see the cash rate rising anytime soon, probably late 2016 although I'm by no means an expert!

    Cool post 90M! :)

    1. Completely agree with you Jef...regulators are doing the right thing by stepping in but it is going to be disconcerting to investors to realise that they are suddenly paying more interest without one of the usual reasons banks put up their interest rates.

      If you are a NAB customer though I'd definitely look at switching if you are a owner occupier...there is absolutely no reason you as an owner occupier should be paying more because their systems suck

  2. Haha yes indeed never really saw NAB as a big player, have either been a CBA, Westpac and/or now a St.George customer, although UBank seems to be okay