June 13, 2017
This past February, the Commonwealth Bank of Australia, or CBA, put a temporary halt to investor lending, making it more difficult for investors to refinance or for current homeowners to purchase a second property. Many investors use home loan refinancing to help them invest in another home, borrowing against the equity that has been built up in the first property.
CBA announced they will reopen to new investor refinancing in order to rebalance their loan portfolio to comply with APRA bank regulations. The change went into effect on 22 May 2017. As one of Australia’s big four banks and the largest lender nationally, CBA have huge influence and the bank’s move will likely have a wider impact on the market, allowing more lending and property purchases to take place.
CBA has said that the new investor refinance applications will only be for principle and interest repayments. The bank is not taking on any more interest-only home loans for investors. Recently, there have been a series of announcements from financial experts warning against the vulnerabilities the Australian economy faces because of rising household debt and the growth of interest-only loans.
Investment fund JCP Investment Partners has noted that over-extended borrowers could wipe out the equity base of 20% of the major banks. While an interest-only lending option has made it possible for some borrowers to enter the housing market with lower repayments for the first few years of their mortgage, if those borrowers cannot afford their mortgages once the interest-only period ends, especially if rates continue to gradually rise, this could lead to trouble for Australian banks. Even Philip Lowe, a Reserve Bank of Australia governor, has cited concern over the potential crisis of rising household debt.
A CBA spokesperson says of the recent reopening to investors; These changes follow APRA’s announcement in March for banks to reduce the number of interest only home loans, and are aimed at encouraging customers to select principal and interest, where appropriate, to help them own their home faster.
Refinancing is an excellent option if you are considering buying a property for investment purposes. Having the option to make interest-only payments for a set period can make property investment all the more viable as you have a few years to get ahead with other debts before having to start paying down the principle. With CBA’s announcement and the shift in home lending trends, however, it is likely more lenders will move in this direction, opening themselves up to more interest and principle loans and discouraging interest-only borrowing.
This may be a good thing. While paying down an interest-only loan may seem like an appealing, more affordable option, in the end you’ll end up paying more for your loan. This can be a particular problem for investors, who may not always be able to attain a desired return on investment from their property. Attracting a constant stream of tenants for a rental property or selling a property for more than you paid for it all depends on how the market changes over time.
On the other hand, choosing to make principle and interest repayments can help you pay down your loan faster, along with other smart financial steps like making extra repayments and using an offset account. One rule that will never change in the home loan market, whether you are investing or are buying a home to live in, the faster you can pay down your loan, the better.
Written by Refinancing.com.au
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