Finance advice
Rate disparity between rates, interest-only, principal interest rates

Why is there a rate disparity between interest-only and principal interest rates?

By Bianca Dabu

Following the amendments to lending regulations implemented by the Australian Prudential Regulation Authority (APRA) to slow down the influx of people coming into the market, property investors have recently witnessed a huge disparity between interest-only rates and principal interest rates.

According to Momentum Media’s James Mitchell, the gap is at “about a hundred points now” and it has definitely affected the way lenders and brokers conduct their business. For instance, Smart Property Investment’s Phil Tarrant just signed a contract for the purchase of a duplex in Queensland and his mortgage broker outlined to him the different scenarios he could end up in depending on the type of loan he chooses.

The property investor shared: “[My broker] said ..., ‘If you go principal-and-interest loans, at least I can get you high 3 per cent interest rates, but if you go interest-only and borrowing at 90 per cent, it's going to be sort of mid-5s.’ ”

“He goes … ‘It's going to be about $200-difference to go principal-and-interest you're going to be paying down an interest component of it. No worries at 90 per cent,’ ” he added.

The reason behind the disparity

James explained that the gap between interest-only rates and principal interest rates are largely due to the APRA changes in lending regulations. In 2015, the government agency thought there were too many investors in the market, so they decided to slow down the influx by putting a “10 per cent cap”.

“Banks can't grow their investor lending by more the 10 per cent on annualised basis. That was sort of met, the market came down a little bit, RBA did two rate cuts, and the market resurged,” the mortgage expert said.

Following the resurgence of the market, APRA then decided to make adjustments to regulations on interest-only loans, saying that there cannot be more than 30 per cent interest-only loans in all new lending records—”for every hundred mortgages you write, only 30 of those can be interest-only”.

In order to achieve this, banks used the pricing lever. They put up the rates for interest-only loans by around 30 basis points and reduced the rates of principal-and-interest loans by around five to ten basis points.

According to James: “They also cut any sort of fees or anything like that to switch over, and they came up with some really competitive fixed rates of P&I as well.”

Politics and the central bank

A lot of investors have been doing well in the market because the prices have been kept low by the central bank, but that is an intervention, according to Momentum Media’s Aleks Vickovich. Based on the basic market dynamics, the Australian property market should not be performing the way it is doing now, but the government intervened.

Aleks said: “This whole conversation if it shows one thing, it's the amount of power that governments have over the market … It's so important to pay attention to this stuff because they can come in and completely change the dynamics just with one piece of law.”

Looking on the bright side, Australian investors may consider themselves fortunate because both the government and the central bank have been proactive in trying to keep the price growth at a reasonable and sustainable level. However, political biases that may affect certain decisions cannot be overlooked in this conversation. Some people believe that they should “let the market be the market”.

“I think there's a few problems. One is that I think, very often there's a political reason why the central bank does what it does ... Central bank takes its orders from [the] government in the same way that APRA does … [but with] some independence, of course,” Aleks explained.

At the end of the day, while the movements of the market are affected by several dynamics such as demand-and-supply and economy, it could still be well-dictated by election cycles. 

 

Tune in to Aleks Vickovich and James Mitchell’s episode on The Smart Property Investment Show to know more about politics, power poverty, rebalancing mortgage books and interest rates, as well as the recent policies by major banks hurting the property market, current monetary policies, and the reasons why there is a disparity in rates.

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Will Magee has had ambitions to enter into the Australian property market for quite some time, but it has been more than just finances holding him back.  Having been granted permanent residency just two weeks ago, Will is wasting no time and is now in the process of signing papers and finding his first investment property.

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In this episode of the Smart Property Investment Show, Will joins host Phil Tarrant to share why he is purchasing his first property in partnership with his brother, discuss the complications that can arise from such a strategy, and unpack the ongoing plan for building a joint property portfolio with his brother.

Will will also share how they approached saving for their first property, why he is taking out the mortgage in his name exclusively, and share their savings plan for the year ahead.

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn.

If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

RELATED AREAS OF INTEREST:

From property in Australia to a ski lodge in Japan
Mortgage Trusts, an alternative first step for property investors
Should a real estate title be in one person’s name only?

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A property investment plan years in the making
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Median house prices in regional Victoria outperformed that of Melbourne in the June quarter, the latest REIV figures reveal. 

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Median house prices in the regions rose 4.0 per cent to $419,500 but in Melbourne they dipped by 0.6 of a percentage point to $840,000.

The result in Melbourne was due to a 0.8 of a percentage point fall in prices achieved at auction; this was despite a lift of 2.3 per cent in private sales.

Inner Melbourne suffered due to auction prices, where median prices fell by 4.9 per cent to $1,459,000 but it was middle Melbourne that was hardest hit, with a 5.4 per cent drop to $974,500.

Outer Melbourne had a good quarter with the median rising by 0.5 of a percentage point to $681,000.

Apartment prices in regional Victoria grew by 3.7 per cent to $304,500 while the metro media was up by 0.5 of a percentage point to $604,000.

REIV President Richard Simpson said that despite fewer sales, many sectors of the market were performing well.

“2017 was a bumper year and while the trendline has flattened, despite the fall in median house prices in the June quarter, median prices are still up this calendar year for both houses and units, in Melbourne and in the regions,” Mr Simpson said. 

In particular there was been strong growth in regional centres which is probably due to the first-home buyers’ concessions said Mr Simpsons.

“The first-home buyers’ concession has been a boon for regional areas. A new entrant to the property market buying a house at the regional median will pay no stamp duty, while a first home buyer of an apartment in Melbourne at the median price would pay stamp duty of nearly $25,000,” he said.

Mr Simpson said that more prospective buyers are looking towards regional Victoria which is also having an effect in Melbourne.

“Melbourne’s outer perimeter continues to grow. Small increases in the June quarter mean that the median prices for both houses and units have risen over 10.5 per cent from a year ago.

Mr Simpson said moving forward that vendors need more realistic expectations as the highs of 2017 are now over.

“Negative chatter about the future of the sector coupled with stronger lending controls by financial institutions has created some uncertainty and vendors need to be realistic with their price expectations,” Mr Simpson said.

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Regional Victoria showing up Melbourne in price performance, new data finds
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  string(381) "

If Mark Hodge’s face looks familiar to you it could be because of his time working as a professional entertainer which saw him working with the Australian ballet, appearing on multiple seasons of Dancing with the Stars and touring in musical theatre for 17 years. What you may not know is that Mark is also heavily involved in the short-term property rental marketspace.

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Mark joins host Phil Tarrant to discuss his transition from entertainer to investor, a journey pushed forward by dance related injuries and even a hit and run which saw him needing to find alternate methods to bring in an income. Mark shares how bad long-term tenants and a gang member guided him to the short-term rental market, and how this pushed him into helping others to realise the same benefits.

Mark will also address the common concerns, discuss what his company Maisonnets specialise in and unpack how they are making the process of filling short term rentals easier for investors.

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn.

If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

RELATED AREAS OF INTEREST:

The hard-to-swallow truth: The prickly points of the Airbnb reforms
Airbnb reforms unpacked for property investors
Airbnb leasing: What are a landlord’s rights and responsibilities? 


AREAS MENTIONED:

Melbourne
Sydney
Rushcutters Bay
Maroubra
Potts Point

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From pirouettes to property investment

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