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Why is my interest rate increasing, and who is APRA ?

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Are you one of the many Australians that received a letter recently about your investment or interest only loan ?

Chances are that letter says that your variable rate will be increasing

If the RBA hasn’t moved the cash rate why has your interest rate gone up ?

Over the last few months APRA has made recommendations to the lenders that it regulates – in relation to their investment lending customers.  They believe that there are “heightened levels of risk” in the housing market.

Who is APRA ?

APRA stands for, The Australian Prudential Regulation Authority (APRA).

The APRA website states:

“The Australian Prudential Regulation Authority (APRA) oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, private health insurance, friendly societies and most members of the superannuation industry. APRA is funded largely by the industries that it supervises. It was established on 1 July 1998.”

You could call them an industry ‘watchdog’ and for this article, I’m looking solely at their impact on lending, so their regulatory actions with regarding to mortgage providers.

How these changes have affected your interest rate

APRA has ordered ANZ, Commonwealth Bank, NAB, Westpac and Macquarie Bank to increase the amount of capital required for their residential mortgage exposures, meaning they will have to retain billions of dollars that would otherwise have gone out in home loans. The result is more expensive mortgages/higher interest rates.

APRA’s submission to the ongoing federal Inquiry into Home Ownership said that while Australia’s system has historically been solid, risks have emerged and things can change quickly.

Read the Full Statement to the House of Representatives Standing Committee on Economics Inquiry Into Home Ownership

APRA’s guidelines have been implemented by lenders in differrent ways.  Some have raised investment interest rates higher than owner occupied, whilst others have reduced loan to value ratios (% of property value you can borrow) or they’ve changed the way loan affordability is calculated.

What does this mean for you ?

The knee-jerk reaction would be to refinance your loan to one of the lenders that has not increased rates. In fact, I’ve seen some recommendations from others in my industry saying just that.

Before you jump into this you need to consider;

a) what the associated costs are to change

b) how much the change in rates will affect your investment return if you do nothing

c) consider what might happen if the other lenders make a interest rate change leaving you no better off.

This is also a good time to re-assess a variable rate v’s fixed rate option.

Do you know your current lenders fixed rate  ?

These points are also relevant to any potential investment lending you are looking to take out as well.

What presents the greatest opportunity right now is your owner occupied mortgage.

Remember the changes are all about investment lending. This means that lenders are more hungry than ever to grow their owner occupied lending portfolio.

We are currently seeing excellent interest rates and incentives to attract this type of lending. My advice right now would be to look at how your non-investment mortgage is performing and the options available to potentially save some cash or be able to reduce your balance sooner.

Let’s talk  further on Periscope !

Samantha is the Director of Thrive Investment Finance.  She started Thrive to share her specialist expertise and passion for finance. She works with everyday people – mums and dads, small business owners, health workers, administrators, tradies, teachers – people like you and me. People with no specialist expertise in finance who want to create a secure future without missing out on life today.

Contact Thrive (07) 3103 1450

* Find out more about Periscope here

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