The RBA has been forced to watch from the sidelines as property prices have soared. Ordinarily, they would put the brake on the property market by raising interest rates however, with the majority of the economy at a standstill, this has simply not been an option.

In response to these concerns, banks are being forced by the Australian Prudential Regulation Authority (APRA) to slow the growth in their housing investor loan portfolios to less than 10 per cent a year. This has prompted banks to tighten lending conditions and raise rates for new investor borrowers.

In order to comply with the new regulation, the Commonwealth Bank of Australia on Friday said it would increase interest rates for investors by 0.27 percentage points, joining ANZ Banking Group, which raised rates for investors by the same amount last Thursday.

All banks have reduced loan-to-value ratios (LVRs) on investor loans, with Westpac the nation’s biggest lenders to investors, slashing its LVRs earlier this month from 95 per cent to 80 per cent (meaning a $200,000 deposit if you’re buying a $1 million dollar property).

Banks have also removed mortgage discounts from investor loans and have cut back on offering riskier products such as interest-only loans. Furthermore, investors are now being assessed as needing to be able to service loans at higher than seven per cent (a two per cent buffer).

The premise is that fewer investors should mean less competition for property and less pressure on house price growth, which is welcome news for first home buyers. However, it is obviously less popular with investors as many will now need to revaluate their strategy and perhaps hold off purchasing their next portfolio addition.

Only time will tell as to how effective these measures are in softening the property market however, many experts firmly believe the market may have already peaked and that while we are not in for any major crash, that a minor correction may be in store over the coming years.

We encourage investors and would-be investors to factor in rate rises of between 2% and 3% when analysing the affordability of an investment property. The key to any sound investment strategy is holding a quality investment for the long term and never being in a position where you are a forced seller.

The information provided above is general information only and individuals should seek specialised advice from a qualified financial adviser. Please contact Hewison Private Wealth for more information.