Why Have Home Loans Become Harder?

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Rapid rises in property values in Sydney over the last couple of years appear to have led to nationwide home loan cost increases and lending restrictions. Government’s finance police (APRA) and the major banks key decision makers all reside in Sydney.  Their localised view has resulted in restrictions on lending practices nationwide that is making home loan lending harder and is likely to dampen property markets.

APRA made a decision last year that all banks were to keep growth of their property investment loans to below 10% pa of their total borrowings, resulting in suffocating restrictions in investment lending across the country.

To comply with this request, banks have all responded using a mixture of ongoing tactics including increasing interest rates, reducing Loan to Valuation Ratios (LVRs) for investment borrowings, decreasing and in some instances completely withdrawing loans for property investments.

All property investors have felt the pinch. An initial discomfort rise in rates varying from 0.25% – 0.50% has already occurred and more are likely to come. Highly leveraged Investors are feeling the most pinch.

Flowing on from these APRA policies, are also the higher resultant interest rates for owner occupied loans with the majors led by Westpac announcing increases in mortgage rates to its customers to offset the impact of directions to hold higher levels of capital reserves.

Welcome to the world of a 2 stream rate economy – one rate for home loans and one rate for investment loans. Let’s exacerbate the already complex, as the banks are also varying their treatment of principal + interest loans versus interest only loans.

The biggest hidden impact – that is yet to fully surface  – is the bank’s decision to reduce the amount you can borrow.  We are seeing an investor’s ability to borrow being reduced by up to 40-50% with these new changes.

The solution lies in home owners and property investors investigating their refinance options to reduce repayments and increase yields. Property investors would be wise to consider comparing other banks in order to complete growing their property portfolio, moving to banks with more flexibility and higher borrowing capacities.

Given this dramatic change, now is a good time to book a loan review of your current lending portfolio, with Fixed rates as low as 3.99% and variable rates as low as 4.13%.

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