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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Tune in to the latest episode of Property Showcase, the podcast with the inside track on the products and businesses that will help turbocharge your portfolio, maximise returns and make your overall investment experience seamless and stress-free!

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To hear more about these services, make sure to tune into this episode of Property Showcase!

 Make sure you never miss an episode by subscribing to us now on iTunes!

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Many investors who would have been successfully approved for finance last year are struggling now to either begin or continue their property investment journey because of the current financial climate.

In this episode of the Smart Property Investment Show, broker John Manciamelli and Momentum Media director Alex Whitlock joins host Tim Neary to discuss how APRA changes and the royal commission have resulted in a tighter lending economy and what that means for Australian investors.

They discuss what traps investors should avoid if they are trying to obtain finance, the four key growth drivers in a property market and unpacking trust structures while revealing one type of trust that you should miss.

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!

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When buying property, it’s important to focus on what’s important. Investor Katarina Taurian shares just what exactly is important to her: having the mindset of looking past superficial cosmetic matters and homing in on the structural suitability and potential of a property.

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In this episode of the Smart Property Investment Show, Katarina joins host Tim Neary to unpack her entry into the property market and experiences of rentvesting, and how the Smart Property Investment Show was vital  in a number of decisions which she made along the way.

Katarina discusses about the team that she had help her along the way, why she thinks that you should never skimp on a good solicitor and accountant, and the red flags which tell her why buying a new property doesn’t necessarily mean buying a better property.

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!

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More than just bricks and mortar, experts often regard property investment as a ‘game of finance’. As such, a good finance strategy can lead any investor to success.

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Why buying new property doesn’t mean buying better property

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