What can make investors switch lenders?

By Gerv Tacadena | 20 Oct 2020

A small difference in interest rates is enough for property investors to consider switching or refinancing with another lender, according to a new study by the Property Investment Professionals of Australia (PIPA).

One in three investors said they would consider moving their portfolio to take advantage of even a half percentage point difference in mortgage rates. For 65% of investors, a difference of up to one percentage point can compel them to switch lenders.

Peter Koulizos, chairperson of PIPA, said the results of the survey indicate that investors are actively looking for better deals to take advantage of the low-rate environment.

"Investors have had to pay unfairly high interest rates ever since they were unnecessarily targeted by the Australian Prudential Regulation Authority a number of years ago," he said.

In 2014, the APRA set a limit on the growth of residential investment loans. In the next four years, banks were required to restrict growth in investment loans to 10%.

The APRA also introduced a measure limiting interest-only lending for more than a year starting in 2017. Interest-only loans are typically used by property investors who are taking advantage of tax deductions.

Koulizos said cash flow is a crucial consideration for many investors who are currently under financial pressures due to the COVID-19 pandemic. He said lower rates help alleviate these financial setbacks and improve cash flow.

"Reduced, or even no, rent coming in meant that more than 13% of investors indicated in the survey that they had a cash flow deficit each month," he said.

Furthermore, around 8% of investors had to apply for repayment deferral during the lockdown phase. Roughly the same accessed their super fund due to the reductions in personal and rental incomes.

Despite expectations that the cash rate will be reduced further this month, the RBA decided to hold it at its current historic low of 0.25%.

While the central bank believes that a global economic recovery is underway, it remains to be seen whether its targets are achievable in the near to medium term. This could point to a possible rate cut next month, said Shane Oliver, chief economist at AMP Capital.

"Our base case remains that the RBA will cut the cash rate, the term funding facility rate and the three-year bond yield target to 0.1% and will now do this at its November meeting after it has updated its forecasts, which will likely show that its employment and inflation objectives are still not going to be met over the next two years at least," he said.

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