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  • What happened to the interest rate on my investment loan?

  • What happened to the interest rate on my investment loan?

    You may be wondering why you just received a letter from your lender telling you that the interest rate on your investment loan has just gone up and be thinking ‘did I miss something’? No one said anything about rates going up when the Reserve Bank (RBA) made their announcement recently.
    No, the RBA is continuing to sit on their hands so to speak but over the last two months, many of Australia’s lenders have made sweeping changes to their lending policies.

    Why? They have been forced by the Australian Prudential Regulation Authority (APRA) to change plans to restrict lending targeted at investors. The knock on effect of this has also seen some more general changes made which apply to all borrowers.

    These changes have included increases in assessment rates that the banks use. The assessment rate is the interest rate the lender puts into their borrowing capacity calculator to test what would happen if interest rates were to rise suddenly. Now normally this is 2% above the current interest rate, so for many lenders this is an assessment rate below 6.5%. With rates at historical lows, APRA concerned about possible defaults when rates rise has asked lenders to use a minimum of 7.5% and principle interest payments.

    What does this change mean? A reduction in borrowing capacity!

    For example let’s say you want to borrow $500,000 to qualify for the loan:

    Under the old test, you needed to be able to cover payments of $32,500

    Under the new test, you need to be able to meet payments of $41,950

    That a difference of $9,450 or a reduced loan amount of $387,000

    For investors, lenders have also reduced many forms of income previously used from being included.

    Examples of this have been a reduction in the level of rental income, the exclusion of some alternative investment earnings.

    Along with the removal of the use of any possible negative gearing benefits that can be contributed to assisting with serviceability.

    For investors in Sydney and Melbourne, there is even a greater double whammy with not just increased assessment rates, but with some lenders reduced the loan to value ratios (LVR).

    This reduction to an 80% LVR is already beginning to impact investors negatively, and we have already seen several clients who have bought off the plan properties in distress.

    Particularly frustrating for investors had been the fact that while they received a pre-approval from their lender when they started the process, as settlement drew closer the lender applied their recently changed lending policy. As a result, they would no longer be in a position to approve the loan.

    If you worried that you might be affected now is a great time to contact us at Awesome Lending Solutions for a list of lenders who have implemented some of the above changes.

    Indeed, with so many lenders making so many changes to their lending policies, the home loan market has become more complex.

    Now, more than ever is a great time to speak with a professional to ensure you have the best deal possible.

    The other thing to keep in mind is that all of this is designed by APRA to slow lending to property investors and reduce the chance of a property bubble.

    So while owner-occupiers may be affected by some of the policy because they are primarily designed to impact property investors, there are some excellent rates and opportunities available for homeowners and also business owners.

    At Awesome Lending Solutions, we have access to a broad range of lenders and hundreds of products.

    It is this knowledge that means we can help you navigate through the current lending changes to find the right lender and loan for your needs by providing you with our Property Acquisition Plan.

    To hear more on the ever rapidly changing lending market why not click the link below to purchase your tickets to our next event where we will be talking about this very thing.