Cash Rate Steady
Last Tuesday the Reserve Bank of Australia left the official cash rate on hold for the 6th month in a row. Despite Governor Philip Lowe citing a rise in business and consumer confidence and improved global economies, the RBA chose once again to take a wait and see approach.
With the Cash Rate at its lowest ever level you could be forgiven for thinking everything is looking rosy.
Banks Increase Interest Rates
Remember the good old days when banks only changed interest rates when the RBA did? We can, but it’s a distant fading memory.
Despite no movement in the Cash Rate lenders increased interest rates by up to 0.60% while we were all in a food coma over Christmas. Sneaky! Hardest hit were the record low, longer term fixed rates and also investment rates.
Banks continue to increase rates out of cycle with NAB, ANZ, Suncorp, ME and Virgin Money putting up rates in January.
So what’s going on?
- The “Trump effect” on the price of funding: costs are increasing, within minutes of the US election result there was a spike in US 10-year Treasury Benchmark, a key indicator that shapes the cost of money on international markets. It has been 30% higher ever since. Consequently, the cost of funding for Australian banks has risen.
- APRA pressure: since late 2014, the Australian Prudential Regulation Authority (APRA) has been putting increasing pressure on lenders to hold more capital as a buffer against a possible economic downturn caused by the Sydney and Melbourne overheated housing markets. APRA have also instigated a 10% limit on investment lending growth which some Australian lenders are now working hard to stay under.
- Profits receding: In 2015 the “big four” Australian banks recorded a record $30 billion in profit. In 2016 that fell slightly to just under $30 billion.
With profits decreasing, funding costs rising and added regulation costs, out of cycle interest rate increases were inevitable.
A radical consequence – no more investment loans!
In the last few days two banks (CBA & BankWest) have ceased accepting refinance applications from investors as they try to stay under the 10% investment growth cap APRA has set. Both lenders quoting the need to maintain “prudent lending practices” as the motive.
We are also seeing a recent trickle of lenders increasing interest rates to investors or loans with interest only repayments.
Still good deals to be found
Despite all the doom and gloom for investment lending there is some good news.
Firstly, it’s worth noting that we still have near record low interest rates in Australia.
Secondly, some lenders are still well under the APRA 10% cap and are therefore maintaining an appetite for investment lending. So there are still some very good interest rates for investment lending to be found, if you know where to look.
Two lenders that we know of are still offering great investment loan packages at around 3.9% with some impressive product features.