September 6, 2015
The unexpected rate rise
APRA – (Australian Prudential Regulation Authority) has recently set some guidance on our lending institutions should be dealing with the recent flurry of lending.
Many lenders have been finding that their lending has predominantly been geared towards investment. APRA has been looking to curb this. In fact, they have imposed some limits on lenders in relation to their investment portfolio. Lenders have been asked to curb their investment lending growth to 10% of their previous year.
How does a lender reduce lending without reducing returns?
Quite simply. They increase their interest rates.
Currently many lenders have been increasing their interest rates for investment loans, intending to slow the amount of investment debt to co-incide with APRA recommendations.
However, the side effect – that many people have not realised – is that this increase to interest rates is not only to new loans, but also retrospective to existing investment loans.
This is where many Australians are about to be caught out. Unknowingly, their investment rates have increased by about 0.3% (on average) in the last couple of months.
Though some investors may not be overly fazed by this, there is a small group of people that will be affected (some unknowingly) by this increase without understanding why.
Some borrowers may purchase a property as an investment initially, but through life changes, may end up moving into the property. Unknowingly, they are living in threir home with an investment loan. Until recently, that wasn’t an issue, but with the recent rate rises, they will have an inadvertent rate rise solely because the loan initially was an investment loan.
PURPOSE OF FUNDS
Lenders determine if a loan is an investment or owner occupied loan by the initial purpose of the loan. If the loan was used to buy a rental property – then it would typically be an investment loan. Of course if you took a loan to buy the place you live in, then it would be an owner occupied loan.
But, you may have purchased a property to rent out intially, but later in time, choose to move into the property. You may have kept paying the loan (which is fine) without too much concern. However lenders have been increasing any loan where the intial purpose of the loan was for investment purposes. This means, if you moved into a property that has a loan that was initially intended to be for investment, the loan may be liable for a slight rate rise.
Why pay more than you need to?
There is no need to so. If you want to find out what you can do to ensure you aren’t paying investment rates for a property that you are living in, contact us today, and we will discuss your situation in more detail and give you options on moving forward.