IO investors slugged with 73 basis point rise

by Miklos Bolza07 Aug 2017
The average interest only investment loans with a variable rate have shot up by 73 basis points due to rate movements beginning last November.

These figures, from the latest Reserve Bank of Australia (RBA) Statement on Monetary Policy released on Thursday (3 August), reveal this increase was caused by a double whammy of rate rises in November and again in June.

“Since May, most lenders have increased their standard variable reference rates for interest-only loans by around 30 basis points and reduced standard variable rates for principal-and-interest loans to owner-occupiers by around five basis points,” the RBA wrote.

The net effect of these changes alone has increased the outstanding variable rate by around five basis points since May, with a rise of 13 basis points since November.

However, the Reserve Bank also said the increase in the average rate for all outstanding loans is expected to be less than the five and 13 basis point change estimates for three reasons:
  • It is likely that some existing borrowers will switch their repayment terms from interest only to principal and interest
  • The lowest advertised variable interest rates for the majors and mid-sized lenders have not increased to the same extent as the reference rates
  • Interest rates for new fixed rate loans remain below those on maturing loans meaning that borrowers can roll over their loans as they mature for lower rates
The average fixed and variable rates, as well as the associated changes since November, are listed below:
 
  Interest rate Change since Nov 2016
Variable P&I rate    
Owner occupier 4.41% -4 basis points
Investor 4.98% +29 basis points
Variable IO rate    
Owner occupier 4.98% +52 basis points
Investor 5.46% +73 basis points
Fixed P&I rate    
Owner occupier 4.14% +3 basis points
Investor 4.45% +20 basis points
Average outstanding rate 4.63% +13 basis points

The RBA also flagged a number of uncertainties to watch out for when making housing market predictions in the future.

“The risk of more weakness in apartment prices in some locations where a large amount of supply is coming online remains. This could mean that buildings approved but not commenced do not go ahead, in which case dwelling investment and related household spending would be weaker than expected.”

Decreasing house prices could also spell trouble for some apartment developers, the RBA added.

“Recent state and federal budget measures intended to restrain foreign investment have not yet had time to have had their full effects, which are uncertain; however, the effects are likely to be largest in housing markets where foreign buyers have been most active, particularly inner-city apartments.”

Related stories:

Fixed rate demand highest in three years

Foreign investors paying quadruple in stamp duty

Melbourne gains driving national property market

COMMENTS

  • by Finding it difficult 7/08/2017 8:55:01 AM

    Try and explain to the bloke who has been hit with 73 basis point rise, that the average is only 13 basis points. Yep. That will make him happy and answer all of his questions for sure !!!