NAB hikes rates on interest only loans

Cross-posted from Martin North.

NAB is the latest player to announce mortgage repricing changes, but with a focus in interest-only loans (whether owner-occupied or investment loans).

“National Australia Bank today announced it will increase variable interest rates on interest-only home loans and line of credit facilities by 29 basis points.

The changes are in response to industry concerns about the pace of investor growth, and NAB’s focus on delivering responsible lending practices into the Australian housing market.

Over the past three years, total housing loans have grown by 27 per cent across the industry.

During the same period, growth in housing investment loans and interest only loans has been 34 per cent and 44 per cent respectively. Interest only loans are the predominant structure for investors.

NAB Group Executive Personal Banking, Gavin Slater, said that the higher growth rates in investment and interest only loans had implications from a regulatory, industry and banking perspective.

In December last year, APRA announced a range of measures to reinforce sound lending practices across the industry. NAB has been working closely with the regulator to support these measures, including actions to restrict investor lending growth to no more than 10% p.a..

“In considering these and a range of other factors, NAB is confident the steps we are taking are the right approach to further support responsible lending practices,” Mr Slater said.

“In an environment of record low interest rates, NAB believes it is important to encourage our customers to pay down their home loan.”

NAB continually reviews its lending practices and remains committed to maintaining prudent lending standards and fulfilling its regulatory obligations.

For new loans, NAB’s interest only variable rate changes will be effective 10 August 2015.The change for existing interest only variable rate loans will be effective 10 September 2015. Additionally, changes to NAB’s fixed rate interest only loans will be effective 10 August 2015. Changes to NAB’s line of credit loans will be effective 10 September 2015.

Customers who want to know more about these changes and the impact on their circumstances are encouraged to talk to their banker about what works best for them”.

Our modelling suggests up to 35% of NAB mortgages may be impacted by these changes, creating a broader base of re-pricing than ANZ and CBA have announced. The quantum of the interest rise at 29 basis points is similar.  The net yield from this approach could well provide a higher return for NAB in terms of margins, unless owner-occupied interest-only borrowers decide to refinance to a competitor with a lower rate. Also NAB’s headline investor loan rate (not interest-only) will be more competitive than others, though of course headline rates are often discounted. We are noting some reduction in net average discounts on new loans being written across the industry.

In APRA’s recent reviews, they noted that some lenders were not adequately considering borrower repayment strategies on interest-only loans beyond the initial interest-only term. NAB’s repricing will reduce the relative attractiveness of interest-only loans.

Of note is the fact that Basel IV will likely lift the capital required for interest-only lending, so NAB’s move could be seen as preemptive positioning.

Houses and Holes
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Comments

  1. No sweat on the brow ….yet No hands a tremble ,,,,,,,, yet What we see with the lowering of LVR requiring down-payment of around 20% is that speculators will be LOCKED into their DEBT as I believe very few who have hard earned in their pockets will play the greater fool game at this late stage.

    Time on market is about to be a growing statistic and will foretell of the Great Australian Transition (GAT) to a competitive nation with appropriate ‘input’ pricing including shelter.

    The interest hikes are the first in a series that will more accurately reflect the risk profile of the speculator sector.

    • Bang on! Just as happened in the GFC to the US, an epic repricing of risk is on its way to Oz. How many ‘investors’ will not be able to afford that repricing?

    • @tonydd a good post. I am interested in the Great Australian Transition. Is this a government policy, why is it not being sold in the presstitute media? “Appropriate input pricing” is the key here as you have pointed out – might I add across the entire spectrum of pricing of goods and services here in Australia, to become competitive again or yet still provide the basis from which to foster entrepreneurship.

      What I find interesting in this small hike is it is the equivalent of the Federal Reserve hike due in September of 0.25%. How will the Federal Reserve hike impact our lending market? Another point is I see the Fed funding rate has been at 0.25% since 2009. Are we going to back to 2.5% – that is approx. 1.5% basis funding increase to our banks USD borrowings to fund our domestic property Ponzi that they cannot escape from – where to flee to borrow funds then? More risk or simply pass on the cost to the captured comsumer who has no escape with full-recourse loans. Your thoughts?

      • @ Tea Merchant
        In fact I just made the GAT up as I wrote as this is what we will witness as victims of both international finance and treacherous politicians. The alternatives are non existent, this is the new reality. For interest rates to remain is to ignore not only the risk of losses but to ignore the actual losses being incurred due to exchange hedging costs for example.

        The risk is everywhere and in everything and every market because this is DEFLATION where debt will not be repaid because it cannot be repaid and the resulting loop.

        So if you have money you can put it in your pocket or you can choose black or red. There are no more winning options only loss mitigation ones.

        Great strategy demands patients and determination, a quality set speculators lack, they want it now, and now they are going to get it!

  2. Here is a thought: this is a dress rehearsal for the canning of negative gearing. If rents don’t spike _now_ (as is much threatened, whenever this little scam is questioned), we will have solid a contemporaneous data point/evidence that putting costs on infestors doesn’t flow through to rents.

    This is because a 0.29% point interest rate increase off a base of 4% is about a 7% rise in the cost of funding. Negative gearing reduces cost of funding by 20%-30%, on average, say. This is a meaningful fraction of that number…

    • I like that thought.

      Yes the extra margin works out to be $1 – $2 k.

      Something tells me it is just for show.

      Ban interest only loans (instead of charging a bit of an extra fee for their use ).

      • Know IdeaMEMBER

        “Ban interest only loans”

        I presume you are advocating for this in respect of residential property investment, as opposed to any investment.

      • The sad truth about banning interest only loans is that you’re kinda saying…. If you don’t have the means, you can’t play the game.

        But I get your drift – you won’t need as much “means” if house prices were cheaper.

      • If you don’t have the means, you can’t play the game.

        What’s wrong with that? Sub prime ring a bell?

    • Peachy

      Since rents didn’t reduce with lower rates, why would they increase with higher rates?

      Also, I don’t assume every rental property is 80-90% leveraged, therefore as rent increase claims can’t happen in isolation then rent increases won’t happen just because some have an increased cost.

      • Footsore

        I understand your point, but in case you’re not flippant.

        Petrol costs affect all petrol retailers.

        Interest costs don’t affect all landlords, and if it did, they’d affect landlords differently.

      • Of course they won’t increase with higher rates. That is the point.

        And just like canning negative gearing – the lowly geared speculators will be hurt less than the highly geared speculators. Although all will scream if 50% CGT discount is abolished.

      • Forrest GumpMEMBER

        Rents are factored by demand and negative gearing.

        If the demand if high, the asking price will immediatly rise to snag the biggest catch.

        if demand is small and the investor is seeking tax minimalisation via negative gearing, he is willing to continue to fish for the biggest paying tenant and forgo cash flow. If he gets above market rent-He wins. If he doesn’t get anyone (no cash flow) he gets a lower tax bracket- He Wins.

        Failing that, he can afford to sit and wait without any cash flow (depending on his taxable income) while scoring a loss on his taxable income, and cash in on the capital gains in the future….without a tenant in the interim. Again he wins.

        The only time he loses is after he has scored his lower tax bracket (via NG) and then the property is not rented out. Then he needs to act quickly to get it rented. (Assuming he’s not carrying a capital gain).

        Look at the rental market in Perth. Its vacancy rate is double the GFC, but rents still remain higher than the same period. (Thank you negative gearing & 50% CGT discount)

      • ” If he doesn’t get anyone (no cash flow) he gets a lower tax bracket- He Wins.”

        By that logic someone earning no money and being in the no-tax bracket would also win.

  3. refinance market will freeze soon, creating credit squeeze previously not seen by almost anyone on the market. Fear is going to drive our housing market to the ground, +60% fall is just around the corner. economy will colapse and greek situation will look like old good days

    • This is my preferred outcome. Mean reversion + a bit to destroy the sickening worship of unaffordable places to call home. Any other consequences I consider necessary. Slow melt resulted in 30%+ nominal. Aussies will not change voluntarily.

    • 60%? Why would a bank put it self in harms way?

      60% is too much.

      Plus you forgot to say by when and if that’s real or nominal.

      Cheers

      • banks will do the harm just for the benefit of one or two good quarterly reports (keep in mind that nobody in banking industry’s management has any long term interests)

        60%+ is not too much, to get property prices in Australia to a healthy and competitive (in overall economy productivity terms) levels price needs to go down by 50% relative to prices in countries that are our direct competitors (commodity/agriculture exporting countries like Brazil and tourist destinations in Asia pacific region). Falling AUD doesn’t help much because currencies in these other countries are falling even faster.

        60% real or nominal it doesn’t matter, once economy collapses wages will at best stall making real and nominal the same

      • Tassie TomMEMBER

        $520,000 for a 3-bed fibro on a small block in Bexley still seems like a lot of money to me, but probably about right. A 60% decline from the $1.3 million they’re going for at the moment.

    • @Tassie Tom – that is where I would say they are fairly valued. So yes I think that is what would be the ideal situation.

  4. Maybe I’ve got a tin foil hat on but ……

    I’m not buying! Lenders have been pushing interest only loans. A mere 29 basis points is just a transaction cost for the benefit of having an interest only loan.

    Why are they so prevalent? ????

    Why aren’t they being banned or similarly limited????

    Something about this doesn’t smell tight.

    • Regardless ….. the rate cutting cycle appears to have ended and that is the message that should be factored into future investment and speculative decisions.

      Yes could be a show, a show for ratings agencies who are no doubt looking with interest at the various ways Australia might default.

    • innocent bystander

      they are prevalent cause sometimes it makes financial sense to do something else with what otherwise would be the principal repayment eg: put it in an offset account or into super…. One should not assume that they have an interest only loan because they can’t afford to repay the principal component

      • Bollocks.

        They are gaining in popularity in an environment where the opportunity cost of capital (principal repayment) has never been lower.

        This is simple a case of banks displaying moral hazzard and imprudently pushing a higher risk product.

  5. 27 basis points. 27 basis points. 29 basis points.
    Good old Australian banking competition.
    C’mon Westpac, we know you want to …

    • They want to but their archaic systems can’t handle it! Thank Gail kelly and her $0 spent on IT upgrades for that one…

      • Well, Lubby, raising and maintaining one’s public profile does take a lot of money out of the annual budget. One must try to keep the Westie out of Westpac

  6. However you analyse this, it must be said its a turning point (July 2015) in the fortunes of the post 08 ‘great house price inflation’ era.

    Sycophants and Specufestors.

    Straya approaching the rocks.

    (Interesting that these hikes aren’t being portrayed as part of ‘macroprudential’ action in the MSM. And rightly so, who’d want to be responsible for bursting the bubble?)

    Mumbo jumbo is being blamed

  7. The Patrician

    “During the same period, growth in housing investment loans and interest only loans has been 34 per cent and 44 per cent respectively. Interest only loans are the predominant structure for investors”
    MP lol
    Stupid is the new prudent

  8. Let’s put on our Nash hats for the moment. Imagine this as a game and banks as profit maximusers.

    The banks have increased margins by about a rate hikes worth for one segment of customer. They’ve just upped their earnings.

    Good for them.

    But wait you say! This is great because it will contain house price growth and may even reduce demand (after all there is a thing called elasticity)?

    But what if it’s being used to justify a rate cut (neutralizing any orice effect – indeed reducing prices for any segment theydid not end up pricing for). Well what is the overall effect:
    – Liitle net change to the ultimate price of mortgages
    – More profitable banks
    – Those pesky doomsayers are off the banks backs because they finally implemented some Macroprudential

    Did I forget anything? Oh yeah and a lower dollar so we can all pay double for imports. Yadda yadda yadda.

    • +1
      The banks have got a captive/trapped audience of insatiable debt lovers and therefore and an income stream for 20-30 years or so… Ratcheting up the profit they make from these guys makes perfect sense and must be commended.

      • Mwuhaha… excellent. The big 4 have bought all the competition. It’s time for them to act as the oligopoly they are and slowly tighten the noose around the debt addicts necks. If you can’t grow the market any more, then grow the margin instead. Ha ha!

    • I think I didn’t write that well so maybe my “game theoretic” perspective wasn’t very clear.

      What I am really saying it’s all well and good to charge investors more on face value but whose paying whom? In my rough nash equilibrium above:
      – Investors are no worse off
      – Banks are earning more profits from …..
      – Savers

      That’s right savers lose. Watch thebanks lobby harder than ever for that rate cut now that they can claim to have been so good with their prudent motives.

      Straya – the land of gamers and rent seekers.

      • The Nash equilibrium was named after John Forbes Nash. A version of the Nash equilibrium concept was first used by Antoine Augustin Cournot in his theory of oligopoly (1838). In Cournot’s theory, firms choose how much output to produce to maximize their own profit. However, the best output for one firm depends on the outputs of others. A Cournot equilibrium occurs when each firm’s output maximizes its profits given the output of the other firms, which is a pure strategy Nash Equilibrium.

        The modern game-theoretic concept of Nash Equilibrium is instead defined in terms of mixed strategies, where players choose a probability distribution over possible actions. The concept of the mixed strategy Nash Equilibrium was introduced by John von Neumann and Oskar Morgenstern in their 1944 book The Theory of Games and Economic Behavior. However, their analysis was restricted to the special case of zero-sum games. They showed that a mixed-strategy Nash Equilibrium will exist for any zero-sum game with a finite set of actions. The contribution of John Forbes Nash in his 1951 article Non-Cooperative Games was to define a mixed strategy Nash Equilibrium for any game with a finite set of actions and prove that at least one (mixed strategy) Nash Equilibrium must exist in such a game.

        Since the development of the Nash equilibrium concept, game theorists have discovered that it makes misleading predictions (or fails to make a unique prediction) in certain circumstances. Therefore they have proposed many related solution concepts (also called ‘refinements’ of Nash equilibrium) designed to overcome perceived flaws in the Nash concept. One particularly important issue is that some Nash equilibria may be based on threats that are not ‘credible’. Therefore, in 1965 Reinhard Selten proposed subgame perfect equilibrium as a refinement that eliminates equilibria which depend on non-credible threats. Other extensions of the Nash equilibrium concept have addressed what happens if a game is repeated, or what happens if a game is played in the absence of perfect information. However, subsequent refinements and extensions of the Nash equilibrium concept share the main insight on which Nash’s concept rests: all equilibrium concepts analyze what choices will be made when each player takes into account the decision-making of others.

        http://en.wikipedia.org/wiki/Nash_equilibrium

        Well, Nash was a paranoid schizophrenic, and Hayek also obviously had some issues.

        Let’s remember that Nash and his theories helped give us Mutual Assured Destruction as a “security” strategy during the Cold War.

        Math is fun, but “the numbers do not speak for themselves.”

        Skippy… Until we have a theory of everything that is 99.9% accurate, don’t go pointing game theory at humanity’s – this planets head – please. Maybe they can do a run on a bunch of sociopaths gaming the larger population… oops too late:/

  9. More profits at the taxpayers expense. Brilliant.

    And the grubby landlords can just increase the rent to cover it as well as claiming it back. The landless can pay for this mess!

    This is not the answer!

    • This is very much the answer. Rents won’t budge. The specufestor will pay.

      Also, the “would be specufestor” – being the guy living in his house but with a interest only loan + offset account (in order to allow negative gearing to the hilt later, when he plans to rent the house out) – will pay. It is great.

    • Too true! I didn’t think about that. I love subsidising property investors with my hard earned taxes!

      Also see above – possibly at the expense of saversbased on my long run scenario.

      Brilliant strategy by our oligopoly masters.

    • So interest rate hikes on investors, mean higher rents for aspiring home buyers which means they can’t save as much deposit which means….? Oh, of course – higher prices?!?. I just missed the last step sorry Domain.

      • After reading that article I’m now convinced Reus is Andrew Wilson.

        Interest rates up – good for investors! Moar people will buy and investors will charge higher rents!

  10. ErmingtonPlumbingMEMBER

    Lower dollar will make Real estate cheaper for purchasers fleeing china.

    I was packing up after a week long reno at Normanhurst in Sydneys North when a young Chinese girl in a brand new 100k car, just parked across the top of the steep , long driveway, got out and started looking down the sides of the houses.

    When the elderly owner asked what she was doing she said “they” had brought a house backing his (creek in between) and would like to have a look out the back of his house. After a tour was given of the property ( half an hour later) she tell him that she has many buyers interested now and can organise a private sale.

    The owner, whome I later had a beer with, told me that early next year he will sell the house to/through her and that after they exchanged contact details she gave him a big hug , not a cultural norm for the chinese but he is a quite handsom Mauritian fellow, I suppose.

    We were both undecided wether or not she was a professional “aproacher”/ buyer but we both agreed that, getting together with the neighbors may be a good stratagy for negotiating best price, when people want to transfer and move in a whole ready made community of family, friends and associates.

    An Australia/China bust is only going to increase this phenomenon,…. safe haven and all that.
    Investors be dammed the chinese are coming here to stay.

    • Investors be dammed the chinese are coming here to stay.

      Yep, another wave of immigration on the go now, just like the ones that preceded it (Brits, Greeks, Italians, Vietnamese, Cambodians, South Africans etc). No stopping it.

      What makes this one different are the oceans of (largely ill-gotten) money that are coming with the Chinese.

      Sad day for youngsters looking to start their own home….

    • +1 for AUD falls allowing foreigners to afford local real estate.

      On the assumption that your friend’s house is no longer new build (they’re living in it) and he’s going to sell to a foreign buyer… The likelihood of being a key part of a criminal/illegal transaction makes him another example of the problem and decay of Australian values. He is soon to be a criminal, and one of the worst kind IMO.

    • +1 ..and there is still nothing preventing an unapproved foreign national from transferring the title of an existing Australian dwelling into their own name.
      …..no audit of residential land title records for FIRB compliance has been conducted.
      …. and “Asleep at the wheel” Brian Wilson is still chair of the FIRB
      ….and some here think the problem is fixed
      the sham continues

    • Why would you invest in a market that will fall, overall, in the next few years? If the dollar continues to slide , your “bargain” is now worth less…..unless the capital gains continue at such high rates to off-set the currency slide……even then the best you may hope for is standing still or a minor loss.

      Its bizarre. As corrupt as the Chinese supposedly are, are there really that many people that can: A) easily liquidate assets, move cash to Australia, B) are more than happy to make a loss due to currency tanking C) are uninterested in investment prospects…weirdly, D) Care naught for job prospects, and want a bolt hole where the economy, at best, will stagnate for the next half decade(if we are lucky)………????

      I put it to you that the current wave of Chinese interest in our RE is nothing more than an interest in its stratospheric capital gains. As soon those end, so will their interest. Australia is so China exposed that the perturbations over there will also be a disaster here. Just give it time.

      Of course the elephant in the room is whether the Chinese government will allow such an outflow to continue.

    • Classic case of outsourced consultancy developers creating exactly what was specified by outsourced consultancy business analysts who have never bought an investment property or even know that there could be different interest rates for different products.

    • Ronin8317MEMBER

      Sorry, but that is just wrong. They did not create a different product catergory. It has nothing to do with the computing system, it was a management decision to clump them together into the same product.

      • truthisfashionable

        If that’s the case, wouldn’t you say that raises even more questions?

        Could that mean they don’t have an easy way to distinguish between investment or owner occupied loans? If so, how were they balancing the capital requirements between the two risk categories.

    • Cant be serious… assuming they can support different mortgage products (duh, I think…), then just create new ones for investors, with a different rate, and move them over to that. I’m prepared to do it for them for 10mil 

    • innocent bystander

      probably rubbish
      I had an investment loan, interest only, from Westpac, 1% higher than owner occupier, admittedly 2001-2010

  11. And this is meant to stop speculators from buying property?!!! Speculators who have no idea how much their ongoing costs are, how much their yield is… Speculators who believe that property only goes up… Just negative gear it and CG will take care of all this in a few years down the track.

    The way i see it is that the latest APRA capital requirements are only doing 2 things, making banks richer(as per above raising rates) and making it harder for new home owners to buy property hence larger social divide between RE owners and non RE owners.
    Will it ease down house prices? I sure hope so but i’m not betting on it.

  12. from the CM Brisbane..

    why isn’t Ms Rudolph facing 42k fines for blatantly breaking the law???

    MOVE over, Sydney and Melbourne. Chinese interest in Australian property is increasing, and there’s a new hot location.

    Chinese purchasing intent was up 35 per cent month-on-month and up 17 per cent on the same period one year ago, according to Juwai.com’s Purchasing Intent Index for Q2.

    Queensland is the clear winner, with Brisbane, the Gold Coast and Townsville all up in the first half of 2015. The Gold Coast in particular is now the place to be, with purchasing intent up 161 per cent on the first quarter and up a massive 1120 per cent on the same time last year.

    Juwai.com predicts new direct flights from Wuhan to the Gold Coast will bring an additional 35,000 travellers a year, generate $53 million per annum in new tourism spending, and lead to an increase in real estate transactions.

    Brisbane is 12 per cent higher than a year ago after peaking in the first quarter, while Townsville, which also peaked in Q1, is up 4 per cent on last year.

    Juwai.com’s Purchasing Intent Index measures Chinese interest in a given location by tracking online property hunting activity on the portal, which acts as an intermediary between Chinese property buyers and international property marketers.

    In Australia, Juwai.com is the exclusive Chinese marketing partner for Ray White, LJ Hooker, Raine and Horne and Re/Max.

    “Queensland cities have not been the most popular with Chinese buyers over the past five years, but they are growing quickly,” said Simon Henry, co-CEO of Juwai.com.

    “Sydney and Melbourne could lose some investment to Queensland as a result.

    “The Gold Coast is doing particularly well this year, especially as buyer interest temporarily reached a low point in 2014.”

    On July 23, 4.60 Chinese RMB bought one Australian dollar, while five years ago it took 6.12 RMB to buy the same dollar. Juwai.com points to the 25 per cent increase in buying power of the Chinese currency as a key motivator.

    Queensland is perceived by a significant minority of buyers as better value than Sydney and Melbourne, and as the closest part of eastern Australia to China and more tropical, it attracts buyers motivated by lifestyle and environment.

    Mr Henry said Chinese buyers today were different than the Chinese buyer of two or three years ago.

    “Then, they were typically first-time buyers with little experience in international real estate markets. Today, they often already own a property in Australia or another country, and they are more comfortable with the country, the language and the market,” he said.

    Christine Rudolph of Ray White New Farm said 30 to 40 per cent of her sales in the last six months had been to overseas Chinese, mainly from Hong Kong, Shanghai and Singapore.

    She said some of her recent sales included 125 Crosby Road, Hamilton, which sold to buyers from Guangzhou after multiple offers over $2 million, 12006/8 Harbour Road, Hamilton, which sold to buyers based in Shanghai for $1.65 million, and 81 Markwell Street, Hamilton, which sold post-auction to a Sinaporean Chinese family for upwards of $3 million.

    “[The] father was from Singapore, arrived in Brisbane for the weekend and advised his family on the spot to buy the property,” she said.

    “Not only was he impressed with the quality and position but also the fact that they see Brisbane as exceptional value for money, safe and a good lifestyle area.”

    Mr Rudolph said she was making sure all of her listings were automatically translated to Mandarin. “I have changed my recommendation to clients to take the Chinese buyer seriously,” she said.

    Juwai.com’s Simon Henry said if Australia was to continue to attract billions of dollars of international investment, it needed to focus on four key areas.

    “It needs to invest in infrastructure and increase the number of direct flights from China, maintain and improve the quality and reputation of its educational system, invest in protecting high quality of life and regulate foreign visitors and investors with fairness and transparency,” he said.

  13. Forget Great White Sharks, Irukandji jellyfish, Taipans, Eastern Browns, Death Adders, Blue ringed Octopus and Drop Bears ……. The newly crowned ‘Most Dangerous Species’ in Autralia is ‘The Specufestor’ armed with a lethal arsenal of Negative Gearing , Interest Only Loans and Herd Mentality.

  14. SweeperMEMBER

    Could be a move by APRA to rearrange the banks investor loan portfolios (and punish the banks who have ignored macro-prudential). Eg. encourage investors to refinance with lenders who didn’t go way over the 10% cap. NAB was growing way over the 10% cap