New regulations have changed the way financial institutions set interest rates.
There’s now a bigger difference between the rate borrowers are charged when they buy a property to live in, compared to loans taken out by investors who don’t live in their properties. This means the rate available could be cheaper for owner occupiers.
The new approach to investment loans is in response to tighter lending regulations introduced by the Australian Prudential Regulation Authority (APRA). This body is responsible for overseeing the stability of Australia’s financial system and takes a conservative approach to help safeguard it.
After monitoring residential mortgage lending trends and borrowers’ ability to repay their loans, APRA has said it is concerned about housing prices, how much debt households carry, and historically low-interest rates.
In response, it has introduced reforms to improve the quality of new mortgage lending and to moderate investor lending.
These include new limits on the way banks lend money to ensure the lending market remains on track.
Since March this year, only 30 per cent of all new residential lending can comprise interest-only loans and there are limits on the number of interest-only loans with loan-to-value ratios (LVRs) above 80 per cent.
A loan-to-value ratio compares the value of the amount borrowed to the value of the property. The lower the loan-to-value ratio, the less risk both the bank and the borrower take on.
Consequences for borrowers
Although the rules are changing, there are various simple steps borrowers can take to put their loan application in the best position possible.
If you’re a borrower, a good savings history and accurate records of your financial affairs are a great place to start. It’s also important to pay all your bills on time to make sure your credit score is as good as it can be.
A credit score is a borrower’s history of repaying debts. There is a variety of providers from whom you can access your credit score; the Australian Securities and Investments Commission (ASIC) has a full list.
Borrowers will check your credit score when they assess your loan application and it’s important to ensure it’s accurate, as they can contain mistakes.
For instance, sometimes defaults are recorded twice. Another common error happens with people who have very common names. Sometimes lenders can record a missed payment against another person with the same name as their customer.
Making sure your credit score is accurate and having sound financial records are looked on favourably by financial institutions assessing credit applications.
Once your loan has been approved, it’s also important to remember to tell the bank if your circumstances change, for instance, if you move into your investment property or rent out your home.
This is because investors can claim certain costs related to their property in their tax return, while owner-occupiers cannot. To be able to claim investment costs the loan must be marked as an investment loan.
Telling the bank the property’s purpose has changed might also affect the rate attached to the loan.
Talk to me to find out more about how interest rates work and how to put yourself in the best position possible to have your loan approved.