On March 5 the Reserve Bank announced that new rules for loans for property investors were on the way. This news came a week before the Reserve Bank Governor Graeme Wheeler announced, on March 12, that the Official Cash Rate would remain at the same level of 3.5%.
The targeting of residential property investors has been the result of the Reserve Bank’s concern that this group of investors would be more likely than owner occupiers to default in a severe economic crisis, resulting in losses to the lending banks. However opinion is divided on this point.
Property investors with rental property loans cannot be considered more likely to default than many of those with loans taken out against homes to fund businesses or more likely to default than those with high LVR loans for their owner occupier properties.
Putting this argument to one side, the effect of these new rules would be to ensure that lenders hold an adequate level of capital in the event of such a crisis. However this means that the cost to the banks of providing this funding would be passed on to the borrower in the form of steeper lending charges.
Higher costs for property investors could ultimately mean higher rents for tenants, many of whom are already struggling to find accommodation with affordable rents. The possibility of higher rents as a result of the new Reserve Bank rules is therefore coming at an already difficult time for tenants.
The Reserve Bank is asking for feedback on the best way to define an investor for whom these new rules should apply. It has issued a consultation paper on three possible alternative ways to develop this definition. These are
if the mortgaged property is not owner-occupied; or
if servicing of the mortgage loan is primarily reliant on rental income; or
if servicing of the mortgage loan is at all reliant on rental income.
Submissions can be made about these alternatives and about the effect of the new rules and must reach the Reserve Bank by April 7. Once the definition is confirmed, it is expected that the Reserve Bank will require all locally incorporated banks to include residential property investment mortgage loans in a specific asset sub-class, and to hold appropriate regulatory capital for those loans. The rules would come into effect on July 1.
The consultation paper can be found here