Given we’ve been dwelling in the land of low interest rates for an extraordinarily lengthy period of time now, you’d think everything would be pretty straightforward when it comes to securing investment finance these days.
Alas however, the lending landscape is becoming increasingly difficult to navigate. Banks are busy acting completely contrary to monetary policymakers, and regulators are riding in at random junctures to stir the pot.
A lot less interesting
When interest rates dropped dramatically and banks saw an opportunity to make hay while the sun shone on equity laden homeowners/would-be-investors, many lenders came out swinging with interest only loan deals that virtually matched the going variable rate of the day.
These offerings were like the proverbial dangled carrot, and led to a boom that saw 40 per cent of all loans written in Australia by 2015 being IO.
Concerned at the breakneck increase in the amount of people who were not actively paying anything on the principal of their mortgages (often secured against another mortgage) and therefore, making little to no headway in terms of their credit risk position, APRA swept in to impose tougher conditions.
The Australian Prudential & Regulatory Authority’s 30 per cent cap on the percentage of new loans that could be issued as interest only was highly effective. Some might suggest maybe a little too effective, at slowing some of the more heated investor driven housing markets down.
Lenders took it as an opportunity to point the finger at APRA as the fall guy, whilst tightening the purse strings and shoring up profits by raising interest rates independent of the Reserve Bank. And investor borrowers were suddenly feeling the squeeze.
Too little, too late?
Fast forward to today, and there have been numerous ebbs and flows within the financial services sector since those regulations were enforced. IO loans have been on a bit of a popularity roller coaster, as the banks fight a seemingly perpetual battle of trying to woo new customers in an overly competitive market, whilst mitigating risk so as not to further attract the ire of regulators.
Three years on and just 15 per cent of all new loans now being issued are interest only. However, some analysts are saying it’s too little, too late. The damage has already been done. And the impact of the IO lending boom of 2015 hasn’t yet been fully felt. But it’s coming.
According to data, around $360 billion worth of IO loans are still outstanding and will mature over the next three years. This of course coincides with a sharp correction in the property markets, causing many investors to become stuck in that part of the cycle where equity falls rather than rises.
Speaking to the ABC, Professor Richard Holden from the University of New South Wales School of Economics says a whole swathe of investors will be unable to repay their debts.
“If they all need to sell at the same time, even if that’s 20 per cent of these folks, then that leads to a fire sale and you see something looking scarily like what happened in the United States of America in 2008/2009.”
It may pay to revert to P&I
All alarmist rhetoric aside, banks are now attempting to turn the tide, offering incentives to investors who are contemplating switching back to principal and interest repayments.
As mortgage brokers, we’re currently seeing lenders prepared to do some very good deals for clients who are looking to actively reduce their loan principal and gain ground with regard to the equity they hold in their assets.
Gone are the days of easy lending. But the potential to negotiate a better rate still exists. Particularly if you’re prepared to pay down that principal as well.
Ultimately, doing so will not only see you save time and money on your mortgage, but will also help you to shore up that all important equity and potentially reach your investment goals sooner.
If you would like more details on how you can make the switch to a more affordable P&I loan, that could see you get ahead sooner, contact the Trilogy Funding team.