It “makes sense” for banks to charge property investors higher interest rates because their loans have a different risk profile to those being paid off by people living in their home, says National Australia Bank’s head of personal banking, Gavin Slater.
As banks are forced to put the brakes on lending to investors, Mr Slater also said lenders were increasingly competing for owner-occupiers, a trend likely to pick up over the spring property season.
One of the biggest recent changes in mortgage lending in recent months has been the emergence of a two-tier home loan market, as banks charge housing investors higher interest rates than owner-occupiers.
NAB raised interest rates on interest-only home loans by 0.29 percentage points in July, and has curbed the interest rate discounts offered to new property investors.
While the higher rates are partly a response to the Australian Prudential Regulation Authority’s 10 per cent a year cap on housing investor loan growth, Mr Slater said NAB’s decision also reflected the riskiness of lending to landlords in the current economic environment.
Mr Slater noted that investors had previously been charged higher interest rates, until competition forced the two types of home loan interest rates to converge.
“We’re back to looking at it now and we’re saying, well, interest rates are still low but having a bit of a dislocation between investor and owner-occupied makes sense,” Mr Slater said in an interview.
Depending on the bank, many investor borrowers are paying interest rates that are anywhere between 0.27 and 0.6 percentage points higher than those charged to owner-occupiers, and mortgage brokers have predicted this gap will widen.Mr Slater said he could not predict if the gap would widen over the next year or two but it was a “safe assumption” the gap would remain over the medium term. Two-tier makes sense
He argued the two-tier market made sense because owner-occupier and investor loans were used for “fundamentally” different purposes.
For people paying off a home they lived in, the mortgage was “where people go to first in terms of meeting their financial commitments”. Investor loans were affected by different factors including rental yields and the need to find a tenant.
NAB had always appreciated the different risk levels of lending to investors and owner-occupiers, he said, but the bank was now also taking into account the fact that economic conditions for property investors were almost “as good as they get”.
“From a property investor point of view, conditions are, particularly in recent times, very favourable,” he said, noting the low level of interest rates and relatively low unemployment.
“Our perspective is that you look to the future, at some point interest rates will go up, and [we are] recognising that now is a really appropriate time to adjust our pricing to reflect what we believe is the underlying risk in that book.”
While banks must slow their growth in housing investor lending, there are no such restrictions on lending to owner-occupiers, and Mr Slater said this was a key focus of competition.
He said the bank was gearing up for the spring auction season and would put some “very attractive” offers in the market, alongside an emphasis on customer service.
“It probably feels more competitive than it ever has been, because all the lenders now are really going hard at the owner-occupiers, to offset the flows around the investor book,” Mr Slater said.
Of the major banks, NAB had the quickest investor loan growth in the latest July figures, growing by more than 14 per cent a year.
Mr Slater said the monthly rate of investor loan growth was slowing as a result of its decision to raise interest rates, and it would comply with APRA’s cap.