Questions About Macro Prudential Tools
Hi Felicity, I learnt a new word yesterday: macro-prudential. I understand the RBA is also talking about it in relation to investors. It looks like its going to be harder for investors to get loans. What is more scary I heard mortgage brokers saying the banks will soon increase interest rates for investors but keep owner occupiers loans low in a attempt to cool the property boom. Your thoughts? They have been advising investors to consider converting over to fixed interest rate loans.
Hi, great question – interesting term macro-prudential and what does it mean for investors? Macro-prudential controls are financial regulations aimed at minimising the risk to the financial system as a whole, while traditional micro-prudential regulation limits stress individual institutions.
They are measures that are not associated with the monetary policy (raising interest rates) which are designed to slow lending, particularly to property investors.
Some of these measures could include capping loan-to-value ratios or capping debt-to-income ratios or stress testing borrowers capacity to cope with rising interest rates.
At the end of the day, it is anyone’s guess as to what may happen. Growth in the market is not Australia wide and is mainly in cities such as Sydney and Melbourne. When I compare products in the market for investors small differences appear between owner-occupier and investor loans – for example, most lenders that offer Loans at 95% LVR will capitalise the mortgage insurance for owner occupiers but not for investors.
I think regardless of the financial landscape – the most important thing is to check in with your broker or banker when you are transacting a property deal and get the advice to match your circumstances and goals.
Fixed rates are historically very low now and great for locking in and knowing what your cash flow is, the downside is that if you sell the property in the fixed term you can be up for large break cost, so knowing what you want to do with the property determines what type of loan you would take up.