Feb 23, 2018 | Wealth management

5-Part Interest Rate Series: Part 2

Welcome to our 5 part series where we’ll explore the factors that may drive interest rates over the coming year and what you can do to insulate yourself against any changes.

Click here to read part 1

Part 2: Regulatory intervention

Welcome to week 2 of our 5 part series where we explore what factors may drive interest rates over the coming year.  This week we explore how regulatory intervention has the potential to impact interest rates.

Some of you will no doubt have heard of APRA – the Australian Prudential Regulation Authority. APRA oversees regulation in the financial services industry and have had quite a bit to do in the lending space over the past couple of years.  If any of you have noticed your interest rate rising, there’s a fair chance APRA had something to do with it, particularly in relation to investment debt and interest only debt.

The biggest concerns APRA have are the growth in interest only lending and the level of household debt.  As you can see in the chart below interest only loans accounted for 40% of all loans towards the end of 2015.  The trend of only paying interest, while your property goes up in value in great in theory, until the jig is up.  We’re now in a situation where regulatory intervention in lending is limiting the flow of debt and as a result we have downward pressure on property prices.  On top of this, interest only loans don’t last forever – typically 5 years, so for the people without the necessary cash flow to sustain principal and interest repayments, we will see a situation where people are forced to sell further impacting property prices.

You can see on the chart that APRA’s involvement has started to reduce the percentage of interest only loans which is a positive.  In response to APRA’s sanctions the banks have increased rates for interest only borrowers and it appears to be having the desired effect by pushing people towards principal and interest, however I believe there will be stronger measures to come.  With record levels of house hold debt the trend of gently nudging people into principal and interest loans will continue, the only issue is that wage growth is virtually non-existent so where will the money come from to service the increased repayments?

I don’t envy the job that the RBA and APRA have to do.  Curb property price growth, but not so much that it leads to a collapse.  Reduce the level of household debt from record highs, but don’t impact people’s cash flow too much or it’ll reduce household consumption (which accounts for 57% of GDP) and we’ll slow economic growth. It’s a delicate balancing act.

So what can you do?

  1.        If you’re in a position to pay down debt aggressively, do it.
  2.        There are lending structures you can implement that minimise the amount of interest you pay – contact Prime or contact your financial adviser for more information.
  3.        There are some competitive fixed rate loans on the market to give you certainty of repayments – contact Prime or contact your financial adviser for more information.

Disclaimer: This information has been prepared by Primestock Securities Limited ABN 67 089 676 068, AFSL 239180 (“Prime”). Prime accepts no obligation to correct or update the information or opinions in it. This information does not take into account your objectives, financial situation or needs. Before acting on this information, you should consider whether it is appropriate to your situation. It is recommended that you obtain financial, legal and taxation advice before making any financial investment decision. Prime is bound by the Australian Privacy Principles for the handling of personal information.

This information has been prepared by Primestock Securities Limited ABN 67 089 676 068, AFSL 239180 (“Prime”). Prime accepts no obligation to correct or update the information or opinions in it. This information does not take into account your objectives, financial situation or needs. Before acting on this information, you should consider whether it is appropriate to your situation. It is recommended that you obtain financial, legal and taxation advice before making any financial investment decision. Prime is bound by the Australian Privacy Principles for the handling of personal information.

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