What’s happening with APRA and interest rates?
For most people the question would be who is APRA? The Australian Prudential Regulatory Authority or APRA was established by an act of parliament in 1998 following the collapse of several regional banks and is charged with the financial stability of the financial system – which includes oversight of the banks.
When a bank lends $100 – they must hold some “unlent” or lazy capital. For the biggest banks this is as low as $2, for smaller banks it might be as high as $10.
This money can’t be “lent” so earns no money.
It is this capital that buffers a bank in the event of a large default on its loans
APRA is directing Australia’s largest banks (ANZ, NAB, CBA, Westpac, Macquarie) to raise more of this “lazy” capital (and in the event leveling the playing field with smaller banks.
This, of course, comes at a cost – and someone has to pay. These banks have decided that the borrowers must pay
In the midst of a construction uplift being encouraged by low interest rates, and with these dwellings being taken up in larger than historically usual numbers by investors, APRA has also directed lending institutions that they MUST restrict GROWTH in investment lending to no more than 10% per annum
Their logic is that in a downturn, investors would be more likely to offload property than someone in their own home and this might “destabilize” the financial system.
The stick that APRA are applying is forcing a bank to have to raise additional capital if they go over that target.
So in a nutshell
- All banks MUST restrict growth in investment lending to 10% or endure the cost penalty of having to raise additional capital
- The 5 majors have been directed to raise additional capital AND restrict growth in investor lending to 10%
The majors have decided to raise the cost to ALL existing and new investment loans (all Interest Only loans in the case of NAB)
The others have decided to raise the cost to all NEW investment loans
The additional cost varies a little but is generally around 0.27%pa. To keep this in perspective this means that investors have lost out on the most recent Reserve Bank rate cut
The upside at the moment, if there is one, is that owner occupied loans are in high demand. First home buyers and owner occupiers are highly sought after at the moment and this will reflect in price.
“Serious” investors , if I can use that term, will take this in their stride by simply factoring in the cost. A decision to invest should not be so marginal that 0.27%pa would change the decision.
The consumer is entitled to feel a little confused though
- The Reserve Bank has its foot on the accelerator
- APRA has its’ foot on the brake
To understand – the Reserve Bank and APRA in conjunction with each other are trying to have their cake and eat it. Lower interest rates to decrease the Australian Dollar , without over heating housing (especially over heating the investor segment)
Have you ever driven your car with your right foot firmly on the accelerator and your left foot firmly on the brake? It isn’t a good strategy.
There are some who question the wisdom of the Reserve and APRA – but that is not my role. My role is to help you understand what is happening, guide you with accurate facts and help you make considered decisions.
What should you do?
- If you notice the rate on any of your loans go up in the next few weeks and you think it shouldn’t have then you must contact me and we will deal with that together – it’s what I’m here for
- If you believe you currently have 20% or more equity in your own home and if your rate is not currently under 4.5%pa then you should contact me – together we will decide if we can help you make use of the current competition for your highly desirable business as an owner occupier.
References:http://www.afr.com/markets/equity-markets/secret-to-big-bank-profits-20130419-ilt9b, http://www.apra.gov.au/adi/prudentialframework/documents/agn-112-1-1.pdf
Call or Email me anytime… It’s what I’m here for… 0411 601 459
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Alan Heath… Mortgage Broker Brisbane CBD