Andrew Mirams sits down with Kevin Turner from Real Estate talk to discuss the why interests rates are going up.
Kevin: Hi once again Kevin Turner for Real Estate Talk and, of course, the RBA has flagged that interest rates are probably going to be on hold for the foreseeable future.
Raising a number of questions from investors certainly getting them and I know my guest is as well saying well if the RBA is saying that then why are my interest rates going up?
Andrew Mirams from Intuitive Finance join us.
Andrew, no doubt that’s a question you’re getting as well.
Andrew: Very frequently. Kevin, yes hello, it seems to be the flavor of the month. All the news says that the Reserve Bank’s not going to raise rates anytime soon, but now everyone’s getting their letters and advice in the mail and everything like that.
It’s all over the news that rates are growing up, so we’ve seen all the majors and now we’re starting to most of the minor lenders start to increase rates in some way, shape or form.
Specifically, targeting investors, but we’ll also have home loan interest rates rising for the first time.
Kevin: I see a lot of concern also. Would love to get your comment on this about interest-only loans, you know, a number of banks or a number of commentators saying the number of banks are overloaded with them.
What’s your view on that?
Andrew: Yeah, rates are going up and the two reasons that rates are going up are there are some regulatory requirements. APRA and ASIC as part of their tightening are making the banks hold more capital aside for the investment loans and those loans that are actually flagged for investment or interest only which has generally got an investment tune to it.
So they’re being asked to put more buffer or capital aside to fund those.
So that comes at a cost. If they can’t lend it out and they’ve got to hold it that comes at a cost.
It’s easy to blame the regulators. The reality is that around the world interest rates are rising. We’ve got a little bit of a Trump factor.
We’ve got a little bit of a whole range of factors that are seeing our yields across the world raise.
Now, Australia can no longer raise enough money with saving and things like that held by the lenders, so they have to get their capital largely from overseas and around the world to stock up their balance sheets and that’s now coming at a dearer cost.
That’s the real reason that our interest rates are starting to increase.
It is just the cost of money around the world.
There’s always a bit of a lag too isn’t there when interest rates to go up, or there’s a bigger call on investors. They then have to obviously put the rental rates up on their investment properties.
Do you see that happening quickly, or is that just a slow creep Andrew?
Andrew: I think it’ll be a slow creep. Australians are very, very complacent when it comes to interest rates. So we’ve seen them coming down for so long that we’ve all got complacent.
All of a sudden now we’ve got a quarter percent rise or we’ve had through the back of last you had a couple of minor incremental increases with investors and interest only loans. Now we’re starting to see them go up and now everyone is up in arms.
Well, I guess if three years ago Kevin, if I’d offered you investment loan rate of still four and a half to four point seven five percent, you’d have jumped at the chance. So, I guess it’s just managing expectations at the moment.
Will that increase rent? Well, that’s probably more market-driven than interest rate driven I think. Their ability to do so.
Kevin: Fair comment. Just a closing point if I may Andrew. Buffers – what sort of a buffer are the bank’s building in now with the prospect of rates going up.
Andrew: As in are they are servicing buffers and things like that? Yes, still those haven’t changed even for the last two or three interest rate decreases. We’re still seeing most servicing rates somewhere between seven and a quarter to eight percent.
So that’s the reality. That’s what the lenders are bound to through APRA making sure that there’s a responsible lending slant to all the lending that’s going on at the moment.
We don’t want to be overheating the market. We don’t want to be putting people at risk of over committing themselves. If, and when rates start to go up. And we’re seeing the start of that now.
So yeah, there’s still a fair margin or buffer in there. That’s just the reality of the world today.
Kevin: Are they the figures you work on when you’re doing your sums for someone?
Andrew: Yeah, seven a half is about the average rate we tend to use. So seven and a half and then over twenty five year loan term. That’s about the servicing rate for what we have to do now for everyone.
Andrew: I wouldn’t have thought anytime soon. I still think, you know, it’s going to be a good while to we’ve got rates actually at seven and a half percent. But, that’s the buffer that they’re being asked to.
APRA has sort of flagged this week that they might start increasing that to eight and eight and a half and making the banks do that.
They’re obviously concerned with two markets in particular; Melbourne and Sydney continuing to power along and they’re determined to try and take the heat out of the market and not put people of the risk of rushing it. That FOMO affects of people rushing out and putting themselves at just so they don’t miss out.
Kevin: Good talking to you Andrew Mirams from Intuitive Finance. Will catch again soon, thank you.
Andrew: No worries Kevin. Thanks.
This interview was originally published on www.realestatetalk.com.au