The days of cheap home loans are over as regulators force the banks to put more money aside for a rainy day, and it’s likely that everyday Australians are going to foot the bill. The Australian Prudential Regulation Authority (APRA) on Wednesday told banks they would need to put more money aside to protect them in another economic crisis. That means they will have to put more money into conservative assets and consequently will have less to lend out.
It’s a move that will cost the banks more than $8 billion. That figure is likely to go to as much as $20 billion later this year when APRA ups the risk weighting on mortgage debt held by the banks, according to investment bank UBS.
The move marks another step on the inevitable path to increasing interest rates. The RBA has said cash rates of 3.5 per cent would be normal and the government is going to introduce the bank tax. All that is building pressure on the banks to raise rates to protect their profitability. Based on this, rates for the cheapest discounted variable rate loans will cost around 6.2% and mortgage stress will bust all previous records.
We believe the effects won’t be felt straight away but APRA has said meeting the target will be quickly passed on. To raise the money needed, owner occupied home loans will have to be targeted because they represent such a big part of the market.
Home loans make up 40 per cent of the loan market according to the latest RBA data. Mortgage rates have fallen with the the RBA cash rate, which has come down from 7.25 per cent 10 years ago and they have been spared some of the pressure elsewhere in the system.
APRA in March forced the banks to cut their limit on interest-only loans from 40 per cent to 30 per cent of total residential lending by the end of the year to reduce the risk from investment property lending. And back in late 2014 speed restrictions were introduced to prevent residential investment loan books growing by more than 10 per cent a year.
That has all pushed up residential property investment mortgage rates to around 6 per cent. Personal loans, which often fund spending like car purchases and weddings, have interest rates of 14 per cent with major banks. They have been held steady in recent years despite falling official rates and credit card rates have increased slightly while the rate environment has fallen.
Given the rises already, home owners will be hit to meet the costs of APRA’s new requirements.
Now is the time to consult with and obtain advice from us on how to minimise future impact of escalating home loan interest rates.
Ring Stu or Amanda in our Townsville office to discuss your needs and concerns on 1300 861 143.
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