Banking regulators (APRA & Council of Financial Regulators), working closely with the RBA and ASIC, have taken non-prescriptive action which applies to our Big 4 and Macquarie Bank by~
- limiting how much banks can lend to property investors (max. 10% growth for investor loans over the previous year – this could increase to 12%). There are punitive measures for non compliance.
- making sure customers can afford to pay their home loans long term (minimum serviceability benchmark rate is now 7% – some banks are higher)
- banks required to increase capital they hold against lending – must be 25% by June 2016 (currently around 16% – hence we have seen share offers to raise capital)
Currently, the measures lenders are taking are discretionary. Lenders have responded by ~
- limiting investor lending
- assessing customer applications with greater consideration to current conditions and customers’ long term ability to pay their residential loans
- introducing interest rate changes to reflect the lending costs of different loan types (note: some banks are also raising the rates on existing investment loans)
What this means for customers ~
- investment lending may be harder to get
- refinancing and/or additional lending may not be possible
- assessment of borrowing capacity is more stringent
- costs, income, living expense and rental returns are more conservatively assessed
- higher deposits than previously may be required
- previously, a home loan was a home loan. Now Interest Only and Principal and Interest Loan terms are viewed differently, as are investor and Owner Occupier purpose loans.
- more competitive options for home loan customers living in their homes
Some rather drastic action has already been taken by AMP, who have pulled out of all investment lending for the time being – including SMSF loans. NAB have also pulled out of SMSF lending (but will continue to supporting existing customers with loans), discretionary discounts (e.g. given on competitor or volume) are no longer available.
As funding costs rise due to the use of higher equity to fund mortgages, the banks’ return on investments will fall. Banks will no doubt want to pass on the higher costs of equity to its customers (i.e. higher interest rates and fees) or shareholders (lower dividends).
Insofar as property prices are concerned, while there is a perceived mood that pressure on credit may cause prices to fall or stabilise, there is another school of thought that while we have strong continued foreign property investment, the prices may stay buoyant.
While this may all sound negative, the upside is that in slowing down the ratio of investment loans to owner occupied loans, lessens the risk of investors exiting the market en masse in a downturn. Stringent measures imposed by the regulators will also keep our banks strong.