Secret bank business

What’s going on with the banks? With all these interest rate rises, you could be forgiven for thinking they are taking advantage of an opportunity to boost their profit margins on loans, rather than just beefing up their capital requirements, as demanded by APRA.

So far most of the big banks have upped their interest rates on loans to investors, with one of the big four banks also adding an extra slug to owner occupiers with interest-only loans – just for good measure.

This extra expense, however, is not expected to hold back investors for too long. Most investors are already well aware interest rates are at generationally low levels. They still offer very attractive borrowing, despite the recent increases.

Any pause in new property investments will have more to do with the lack of “good opportunities” rather than the higher cost of borrowing.

However, these profit-boosting interest rate rises also signal the banks may soon be looking at other ways to shore up their lending books.

There is already speculation they may be less keen to refinance existing property loans and be reluctant to allow borrowers to draw against their equity. These more strict refinancing requirements will provide a double benefit for lenders. It will help keep their overall loan-to-value ratio low and it will help reduce or delay new property investment purchases. I’m sure they’ll earn two ticks from the regulator and Reserve Bank for such a move.

There is also the possibility lenders may consider asking for a bigger principal component to be included in repayments which will also help lower their risk and beef up their books.

It will be interesting to see what happens next.

Until next week,

Jock Bing