Rate gap is interesting for investor mortgage

Banks are being forced to cut the interest rate premium they are charging new property investors, as lenders compete more fiercely in the investor mortgage market once again.

The mortgage market was split in two last year, after banks resumed charging property investors interest rates that were about 0.25 percentage points higher than owner-occupiers, something that had not occurred since the 1990s.

Now, however, the interest rate gap is narrowing, with several banks recently lowering what they are charging new landlord borrowers.

The change, which will only affect new customers, and not those with existing loans, comes after recent figures have also pointed to new lending rising for property investment – a market where the banking regulator has capped annual loan growth at 10 per cent in response to fears of a housing bubble forming.

Even so, financial regulators say they are more comfortable with lending standards in the housing market, including to investors. That is because banks have cut back on interest-only lending and are assessing borrowers’ living costs more realistically, key regulators said last week.

Dutch lender ING Direct on Friday was the latest to announce a cut-price mortgage deal for investors, offering new investors with a deposit of more than 20 per cent an interest rate of 3.99 per cent.

AMP, which was forced to briefly stop writing new loans last year after growing too quickly, is also charging property investors 3.99 per cent if they borrow more than $750,000. That is about 0.1 percentage points higher than its owner-occupier rate promoted to mortgage brokers.

Macquarie Group cut its fixed rates for investors earlier this month, with a three-year rate of 4.09 per cent.

Mortgage brokers say the trend is gathering pace, and the Reserve Bank observed the bout of competition in its Financial Stability Review on Friday. It played down the risks from banks targeting property investor lending, which it has previously seen as a “speculative” influence on the housing market.

“Competition for investor loans in particular has increased, and banks have recently narrowed the pricing differential between investor and owner-occupier loans,” the RBA said.

“But the tightening of lending standards in recent years has meant that the profile of this new lending is lower risk than it was a year or so ago.”

Australian Prudential Regulation Authority chairman Wayne Byres on Friday said the banking industry had “appreciably improved” lending standards, saying all lenders now stress-tested to make sure new customers could cope with interest rates rising to 7 per cent.

“There is no shortage of competition for the business of home loan borrowers, but we are keen to see the industry’s competitive instincts directed towards pricing, product features and customer service, rather than pursuing market share by reducing the quality of loans written,” Mr Byres said.

Earlier in the year, some banks also relaxed their deposit requirements for property investors in an attempt to fire up sagging rates of credit growth.