In recent weeks we’ve seen a shift in lending policy combined with interest rate hikes across many of the major lenders. So what’s happening and why?
There is ongoing debate about whether we are living in a property bubble. What is fact however, is the fast rate of growth in property values. Sydney housing values for March grew at the fastest annual pace for 15 years. According to the latest monthly CoreLogic Hedonic Home Value Index, Sydney housing values grew by 19.7 per cent, while units in the NSW capital grew by 15.3 per cent over the last year. The study also found that four of the nation’s eight capital cities recorded an annual growth rate in housing values in excess of 10 per cent.
Disturbingly, what’s moving in the other direction is household indebtedness and slow growth in household income. At more than 120 per cent of GDP, Australia’s household debt is substantially higher than in most other advanced countries and has risen markedly in recent years. The governor of the Reserve Bank recently flagged that Australian households are carrying more debt than they have before, which is a “significant issue” that the central bank is “watching carefully”. RBA governor Philip Lowe explained recently that an increase in housing prices has gone “hand-in-hand” with a further pick-up in household indebtedness: “In aggregate, households are carrying more debt than they have before and, at the same time, they are experiencing slower growth in their nominal incomes than they have for some decades. For many, this is a sobering combination,” he said.
Recent changes to lending rules plus interest rate rises
APRA, the mortgage regulator, recently introduced measures to limit the flow of new interest-only mortgages from banks to 30 per cent of total new residential mortgage lending. The regulator also provided instructions to banks to ensure that growth in housing investment mortgages remains comfortably below a 10 per cent limit.
APRA has advised the banks that they won’t tolerate going beyond the growth speed limit and that any breach will prompt a review of the offending bank’s capital requirements.
In the past two weeks, the industry has seen a flurry of mortgage rate hikes from big banks and non-major lenders. Increases at AMP, CBA, ANZ, NAB, Homeloans, Auswide, Bendigo Bank, St. George and Westpac have ranged from seven to 117 basis points. Many of the rate rises have been targeted at investor loans and interest-only loans. Lenders cited APRA’s measures as one of the reasons for hiking their rates. The ratings company Moody’s warned that even though Australian banks have already started to raise lending rates, lending rates for interest-only mortgages “are likely to rise further”.
Impact on borrowers
Industry analysts have warned of hard times ahead for borrowers due to increasing interest rates. The mix of record house prices, pending oversupply of apartments in some cities, investor lending curbs, and elevated household debt levels, coupled with rising interest rates on mortgages could be a volatile cocktail for some borrowers.
Plus, it’s possible negative gearing rules may come under fire at this year’s Federal Budget causing even more changes ahead.
What can you do?
For most borrowers, the lending interest they pay is the biggest cost and the biggest expense they’ll ever have and therefore they need to look after themselves. They need to be alert and, as the rates go up, check whether there is a better rate available and shift where it makes sense.
Borrowers can take action to potentially limit the financial impact of these changes by refinancing their home loans. Those borrowers who have not recently reviewed their cost of debt should certainly be talking to an adviser to see if their rates are appropriate. There are many options available from lenders and in today’s market where credit policies and rates are changing constantly, getting a clear view on what is available from an experienced adviser is important.
To discuss your household debt and explore your mortgage options, please call Prosperity on 1800 855 844.
Matthew Guy is an Authorised Representative of Prosperity Finance Advisers Pty Ltd ABN 69 143 861 303, 309 Kent Street Sydney, NSW 2000 is a Credit Representative (No 479852) of Hillross Financial Services Pty Ltd Licence 232705 ABN 77 003 323 055 and is one entity within the Prosperity Advisers Group Ph. 1800 445 767. Any advice contained in this document is of a general nature only and does not take into account the objectives, financial situation or needs of any particular person.
