If you’ve been following what’s been going on in home loan land in the past two years you may have realised that the unprecedented intervention by the banking regulator, APRA, has had a profound effect on the affordability of a home loan.
These effects cut both ways depending on the type of home buyer you are.
First the good news…
If you’re a true home buyer, that is you are an owner-occupier (OO) and are paying of the principal and interest (P&I) of your home loan, then you will have seen a slight decrease in rates of between 0.06 – 0.10%.
Now the not so good news…
If you’re an investor and have a P&I loan then you’re out of luck as your interest rates will have gone up by between 0.50 – 0.75%.
And the really bad news…
If you’re an investor with an Interest Only (IO) loan then you’re truly out of luck as you will have seen your rates rise by around 1.10 – 1.20%.
We’ve covered off on why this happens in a previous article.
Remember, the only movement in official interest rates since APRA’s intervention began has been down. That’s why the above is without precedent. In fact, the upper echelons of APRA were rumoured to be fuming when the RBA raised rates in 2016.
With the RBA cash rate at historical lows of 1.50% it’s understandable that some commentators are starting to call for an increase in rates next year.
In my view there is a massive risk to the economy if this occurs. There is some ambiguity with the noises emanating from the markets at the moment.
Firstly, there is genuine concern with the level of household debt. If this is the case an increase in rates (coupled with an absence of wages growth) will exasperate this problem and bring the economy to a grinding halt.
On the flip side, the unemployment rate has been trending down. Which has historically meant an increase in wages growth – but there’s no guarantee this will happen this time around as there is still tremendous capacity in the number of people who are underemployed.
Further, our dollar has remained stubbornly high compared to its long term average.
Finally, flipping once again, the RBA has backed itself into a corner with the cash rate. Given it’s at historical lows if the economy took a turn for the worse it can’t exactly keep cutting to stimulate it. This is an argument we’ve been rolling out for a couple of years now and it’s good to see some respected commentators saying the same thing.
We need to look on the bright side. If the RBA increases rates it will mean the economy is going gangbusters and there’s probably been a usable increase in your pay.
Also, APRA is now (finally) hinting that the measures they’ve had in place for residential lending were only meant to be temporary.
That’s the first time I’ve heard anyone from APRA utter those words. It’s also a move we’ve been predicting since we came into business. The reason for APRA making this call…a tremendous drop in investment housing loans. It’s now easier to get a business loan (secured) than it is an investment loan. That hasn’t happened in the short time that we’ve been in business.
So, if you’re waiting for a rate cut and think the banks will pass it on then you should start buying the lottery now.
IF YOU HAVEN’T GUESSED ALREADY, PLEASE NOTE THAT THE WRITER IS NOT AN ECONOMIST AND THIS ARTICLE SHOULD IN NO WAY BE CONSTRUED AS ADVICE.