<![CDATA[Finance Select

Many banks and lenders have recently increased lending rates on all of their investment loans, with little warning. Most increases have already taken effect - on new and existing borrowings.

Is that fair? .... Definitely not. Why so, when the Reserve Bank consistently tells us that rates are stable, unemployment is high and conditions for an economic resurgence are modest?

Well, the banking regulator, APRA www.apra.gov.au has been writing to the banks over the last year to warn them to keep their lending standards high (to control loan volumes) during a period of low rates and high property growth. More lately, they have expressed that each bank's investment lending should not grow by more than 10% per annum.

However, lending to property investors of late has consistently been over the 10% growth ceiling.

The Reserve Bank of Australia said in its latest data that lending to property investors grew by 0.8% in May and 10.4% year-on-year. Moreover, the central bank said housing credit was up 7.2%, close to its fastest pace since 2010.

APRA was prompted to introduce tighter lending conditions which include cutting discounts on investment loans. This new move by APRA came after the country’s investment property lending and soaring property prices continued to grow above 10%. The league table looks like this:

CBA 9.9%
Westpac 10%
ANZ 10.6%
NAB 14.1%
Suncorp 11.6%
Macquarie Bank 86.8% (yes, closer to 100% than 10%)

All that is only mildly alarming. The federal treasurer (and he should know) recently said there was never a better time to have a go. He said that housing is still affordable if you have a steady job.

So, how did the banks react?

First, its relevant to say that not all lenders come under the guise of APRA. However, many lenders receive funding from banks that are. Whether they are or aren't, they mostly feel compelled to fall into line.

At least one lender has ceased all investment lending forthwith! Some have reduced their maximum loan for investment to 80% of valuation. Most have reduced lending ratios, but not all to 80%.

They didn't stop there. Not only have lenders enforced a far stricter lending policy to all loans, but they have used the strongest measure to curtail lending growth - price. For new and existing investment loan borrowers, lenders have increased their rates across the board. Some rates increased by a massive 0.43% per annum!

The retrospective price increase is a penalty for those who have invested in moderation, and within APRA's comfort levels (however those are determined). It's simply unfair, yet there's not been a politician, let alone the federal treasurer that has yet made a single sound about it. Maybe we just can't hear them from the helicopter!

Consider that lender's cost of funds is around 3%, maybe less (the RBA rate is 2%). Some of the lenders passing on a 0.27% rate increase, also held on to 0.05% of the last RBA rate cut. This means it's AT LEAST a 10% increase in their investment loan income. Staggering!

Lenders are saying that because APRA has insisted they increase their cash reserves (capital adequacy ratios) per dollar of loan written, it adds cost to their bottom line. However, it surely is not a 10% slug. In fact, APRA wrote to the banks in February this year to assure them that the additional scrutiny of their portfolios won't impact severely on the bottom line.

We assure you that Finance Select has made representations to our lenders through managers that service our business. However, this comes from far above them. We'll be writing to our investment clients over coming weeks to work through the issues at hand.