Why are investor interest rates Higher than owner occupier now

So.. I have a question i've been wondering about.

When I first started taking out loans as an investor there was no real differentiation between Investor and Owner Occupier. to me that seemed fair, you were assessed on your capacity to handle the loan.

Then APRA brought in the cap on investor loans, at which point the premium on investor interest rates increased by 0.5% - 1%. This seemed like they were riding in investors a bit too hard because they had an excuse. but to some degree there was still some justification behind their actions.

But now that the investor cap has been removed. Why have the investor rates not come back again to owner occupier levels? or am i missing something?

 

Cause banks love money

Cheers

JAmie

 

Clearly I am a bit older than you.

When we started investing in the 1980s, investment loans were at least 2% higher than owner occupier.
Marg

 

but if that's the reason they could have before.. what's changed?

 

what caused that though? and what caused it to come back to normal after?

 

this type of answer should be said in jest. the thing im worried about is that it might actually be true.. are we stuck until the market sentiment / investor witch hunt cools down...

 

Historically, “normal” is for investor loan rates to be higher. It has only been the last decade or so that they have been the same as owner occupier.

Previous to deregulation, interest rates were partly dependent on government decisions. It was seen to be politically desirable to encourage people to buy their own homes.

When we started building our first home, our loan interest rate was 6.25%. During the build, the government of the day (Gough Whitlam) decided the economy was moving a bit fast so overnight jacked the rate up to 8.25%. (So don’t bleat to me about a .25% rate rise!)
Marg

 

thanks marg4000 you've obviously been at this for a while. your 0.25% might be an underestimate from what ive seen, but this is not about "bleating". having only started in 2014, the market changes are new to me. understanding why changes happen means you can plan with a little less uncertainty. its interesting to know that having a difference is actually the norm.. thanks

 

I think you are spot on. My understanding is that borrowing costs for the banks are the same, regardless of the purpose. Happy to be corrected if someone is closer to this than me. I assume banks have to factor in risks but what is more risky at the end of the day in tough economy... a 1.5M owner occupier loan or a 500K investment loan for a property in a good location, that should be rented most of the time?

 

I think you are right Rolf... even though, one day I'd love it, if someone also thought of the other "aussie battler", the one that hopes to get a little ahead in life so that they can have a little more comfortable retirement, who assume all the risks by borrowing lots of money, which also helps the economy, ensuring there is enough housing for everyone, whilst having to work extra hard on their day to day jobs to make the repayments...

 

but wouldn't that mean they are putting basic business principles behind their public perception.
referencing an owner over an investor regardless of risk could be a big mistake if people start feeling too much lending pressure in the future.
derisk on the public perception but increase the business risk to mortgage default.

 

Banks are required to set aside a % of their capital based on their balance sheet in liquid investments. This limits their lending multipliers and makes money more expensive to borrow and that cost is an indirect cost of raising funds. APRA require more to be set aside since "funny loans" became a concern. Some banks didnt even know if some loans were owner occupied or not !! (Westpac was one)

Some assets have a low risk rating and others are higher. Risk results in higher cost. eg Owner occupied P&I loans under 80% LVR rising in scale through to SMSF loans and unsecured personal loans and business debt secured by a floating charge etc. Investor property use loans have a slightly higher rating that owner occupied P&I under 80% LVR so the bank charges a borrower a higher fee to offset its expected and actual higher funding costs. This is also why rates move out of sync with the RBA and markets (although thats actually not a good reason since its just the official cash rate. But it sets the tone for rate movements at the short term scale)

Funding costs themselves are rising. Two factors
1. Global interest rates and exchange rate spreads (they are related to each other)
2. The changing shape of the yield curve. As rates have signs of being on the bottom then the only way is up. And the US Federal reserve have warned about that issue too.

(I used to work in a large bank Treasury)

 

My hypothesis is that previously there was no trigger or event to create a difference in rates between investors and owner occupiers. Had one lender moved, they would have been afraid of public sentiment moving against them and other lenders taking advantage of the situation.

APRA provided a trigger for a few lenders to move in a manner that is socially acceptable. With herd mentality, all the lenders followed. At the same time they compensated with some cuts to owner occupier rates.

Combine that with lending restrictions and they also removed the ability of many investors to vote with their feet.

 

Investors are more likely to default, statistically, than owner occupiers. The risk is therefore higher, so higher rates.
From 2013:-
Investors more likely to default: Fitch

 

investment loan interests are also tax deductible, whereas owner occupied interest is generally not, so from an after tax perspective (assuming you are above the tax free threshold and depending on your marginal tax bracket) investment loans are actually still currently 'cheaper'?

 

Well, one house is a contained debt and people need to live somewhere, vs multiple with debts and the possibility of vacancies.

I don't know about PPOR borrowers subsidising investors because they would probably be paying the same interest rate regardless. Things are getting more competitive for investors and going back to a traditional lending environment that focuses on PPOR.