Residential property investors are kicking up a storm over many banks’ decisions to raise interest rates on investor mortgages. They’re saying it’s ‘unfair’; that they shouldn’t be punished for trying to invest in good faith. Some commentators are pointing out that rate rises will hit investors in low growth areas, as well as those in inner city Sydney and Melbourne.
The truth is, higher rates could help a lot more people than they hurt.
First off, it’s worth pointing out that the rate rises aren’t crazy high. They’re modest increases. If an investor can’t afford a loan because of these rate rises, they probably shouldn’t have taken it out in the first place.
The higher rates shouldn’t exclude many people from investing in property. If people who can afford higher rates choose not to invest, that’s their business.
What a rate rise could do is help make other classes of investors much richer.
How big banks have changed their rates
ANZ [ASX:ANZ] was the first to announce higher interest rates on investor mortgages, nearly two weeks ago. Starting from next Monday, the variable rate on their residential investment loan will rise by 0.27% to 5.65%. Fixed rates for new loans will increase by 0.30%. At the same time, they cut the rate for owner-occupiers by 0.40%. ANZ’s Australia CEO Mark Whelan claimed it was the right decision for ANZ’s competitiveness, and for the wider market. ‘This is a considered decision that takes into account our customers’ position and the criteria we look at when setting rates including our competitive position, our regulatory obligations and the state of the residential property market,’ said Mr Whelan.
The Commonwealth Bank [ASX:CBA] followed ANZ late last week. They also raised their variable rate on investor mortgages by 0.27%, to 5.72%. Fixed rates on new loans will rise by 0.1% and 0.4% — up to 5.14%. CommBank retail banking boss Matt Comyn said ‘In the current market conditions, we believe these changes strike an appropriate balance in our portfolio between owner occupied home loans and those seeking investment loans.’
Then came NAB [ASX:NAB], who raised their rates by 0.29% on interest-only home loans. It’s not quite the same as what the rest of the banks have done. But NAB claims that ‘Interest only loans are the predominant structure for investors.’
Westpac [ASX:WBC] also raised their rates, effective yesterday. Fixed rates on residential investment loans went up 0.3%. Next Monday, standard variable rates for new customers will go up by 0.27% to 5.75%. Consumer banking boss George Frazis said ‘Today’s announcement is an important step in ensuring that Westpac meets APRA’s benchmark that investor credit growth should be no more than 10 per cent.’
Why it’s good for bank investors
Plenty of commentators have pointed out that these rate rises will boost the big banks’ profits. The general consensus from analysts is that it will boost collective profits by $800 million – $1 billion.
That makes sense, when you look at APRA’s banking stats and make a few rough calculations. Together, the Big Four have about $432,363,000,000 worth of investor loans on their books. 0.27% of that is $1,167,380,100. Of course, you then have to take away the cost of discounting owner-occupier loans. But there’s still a lot of potential gain.
Higher profit potential helps push a company’s stock price up. And it also means that investors might get a bigger dividend.
In a time where bank dividends are threatened by capital raising requirements, this can only be a good thing for bank investors.
Why it’s (potentially) good for the ASX
Some investors who are put off by more expensive new investor loans may choose another path. Instead of investing in residential property, they might look to the stock market.
Analysts from several prominent firms have come forward and said that the rate rise may cause investors to think twice about where they put their money. They don’t expect the impact to be huge. But more investors could borrow money to invest (margin lending).
More available money would help push up stock prices. It could be just the bump that the weak Aussie equities market needs.
The Reserve Bank publishes stats on margin lending. Their records show that it was a popular thing to do before the GFC. But it dropped off during and after the crisis. It’s only really stabilised in the last year or two.
Data source: Reserve Bank of Australia
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It will be very interesting to see whether margin lending activity picks up after next Monday.
By the way, if you’re looking for a sound addition to your portfolio, don’t miss Money Morning publisher Kris Sayce’s exclusive report. ‘The Five Best ASX Stocks for 2015’ is available here for free. In this report, Kris discusses five carefully selected stocks that he believes are set to perform particularly well throughout this year, and beyond. It’s a must-read if you want to be ready to take advantage of any potential boost to the ASX due to higher interest rates on property investor loans.
Spectators will probably have to wait until the RBA’s set of margin lending stats for September to see whether activity has really picked up. While you’re waiting, don’t forget to find out how to download your free copy of Kris’s report.
Eva Mellors,
Contributor, Money Morning
The post Two Reasons Property Investor Rate Hikes will Actually be Good for Most Investors appeared first on Stock Market News, Finance and Investments | Money Morning Australia.