The mortgage market is changing fast. As agents, it’s important to understand what’s going on because, if these changes are not impacting your buyers now, they will by the year’s end.
Here’s the executive summary:
• It’s more expensive for investors to secure finance
• It’s more expensive to take out interest-only loans
• It’s more difficult to secure a loan with a small deposit
Any agent who worked through the first months of the GFC will tell you that the harder it becomes for buyers to secure finance, the fewer people turn up to your open homes and more deals fall at the final hurdle.
Fast-forward to today and you’ll see that the investor market has already started to cool as a result of these recent changes, with investor lending falling by 3.6 per cent over the June quarter, according to the most recent data from the Australian Bureau of Statistics.
The dampening of investor borrowing isn’t a result of a global financial crisis. In fact, it’s actually the work of government initiatives to placate parts of our property market and encourage home owners to pay down their debt.
So what happened? And why? There have been four key events that led to such slowdown:
9 December 2014
The first big change occurred almost three years ago, when APRA, the banking regulator, told the banks that they must limit growth in investor lending to 10 per cent per year and place more scrutiny around risky lending practices.
The response: Lenders increased rates for investors from July 2015 and tightened serviceability requirements so some buyers found it harder to get a loan.
20 July 2015
To guard against the risk of a housing collapse, APRA ordered ANZ, Commonwealth Bank, NAB, Westpac and Macquarie to hold more capital with regards to mortgage lending, to increase the resilience of these banks and “the broader financial system”.
The response: Lenders increased variable interest rates across the board in October 2015 to cover the costs of holding more capital.
31 March 2017
APRA stepped up the regulation again this year, taking aim at property owners paying interest-only at a time when Australians find themselves in record debt. Lenders were told to:
• Limit their interest-only lending to 30 per cent of their lending portfolio
• Limit interest-only lending to borrowers with deposits of less than 20 per cent
• Continue to limit investor lending growth
The response: In June 2017, the banks responded by hiking rates for investors and for anyone with interest-only loan, offering a small 0.05 percentage point cut for owner-occupiers paying principal and interest.
19 July 2017
APRA told the big four banks and Macquarie to further increase their financial reserves so they could become “unquestionably strong”. The regulator also told other lenders to increase their capital buffers, but by a smaller amount.
The response: If history is anything to go by, this last regulatory requirement will be felt by customers of the big four in increased rates to cover at least in part the cost of holding more capital.
Feeling the pinch
While mortgage rates still at near record lows, buyers have started to feel the pinch from this series of rate hikes from the banks.
In the last four months, the average of all the variable interest rates listed on RateCity.com.au rose from 4.67 per cent to 4.89 per cent, even though the cash rate didn’t move. Existing property owners might turn a blind eye to an increase of this magnitude, but buyers are more likely to realise the implications. A rate rise of 0.22 percentage points on a $650,000 loan is an extra $31,082 in total.
That’s enough to make even the most zealous buyers rethink their strategy.