Are differential loans a good idea?

Recent reports from the financial sectors have stated that “differential pricing” between owner-occupied and investment property lending has come in to effect, with companies such as NAB's Advantage business offering a 15 basis point discount on the former loan.

So what does this mean? The banks are trying to supposedly take action against what they believe are risky loans to property investors. The argument is, that by loaning out to a home buyer, they are more likely to service the debt as they live there, where as for an investor who has potentially three or four properties, they are more willing to walk away from the debt as they aren't emotionally connected to the property.

This comes amid reports that APRA’s most recent data states, investor lending is rising at 21 per cent year-on-year, more than double the so-called speed limit of 10 per cent identified by the Australian Prudential Regulation Authority (APRA) earlier this year. So should differential loans be put in place or not? We explore.

1. It will limit investment and overall improvement.

The implementation of differential pricing will put some investors off, whilst this will allow more home owners in to the market, it will prevent value appreciation of a suburb, as less people will be developing and adding to the current offerings. Investors are likely to be more hesitant knowing the costs are greater, meaning that suburbs don't flourish as much.

2. It won't necessarily slow price growth.

Whilst it is ideal to think that if you increase the cost of money to investors, less people will invest, there are some people out there that will take the full force of the costs, and just absorb this through negative gearing. If negative gearing laws do not change, then investors will just have a bigger tax deduction at the end of the year, something they may not be too concerned about. 

3. It will encourage people to work around the system.

It wouldn't be surprising if investors purchased homes in one of their family members names, only to have them live there for a short time and then convert it in to an investment property. People are very sneaky when it comes to finding ways around current laws, and this may be just a speed bump for the average investor. 

4. It may not be the solution, with aggressive banks taking risks.

There are still some banks out there that will take risks when loaning out money. APRA stated that the "most generous banks were prepared to lend 50 per cent more than the most conservative." so even with a tightening on restrictions, it seems there are banks that will do anything and everything they can to loan money to investors. Investors make up of the approximate $30 billion written in loans to investors. In March, investor lending was up 6.4 per cent, so banks will be frustrated if they lose their client base. 

5. It won't necessarily get home owners in to the property game. 

The reality is, most people looking to buy homes have price limits that they really need to stick to, whilst trying to slug investors larger fees, it doesn't automatically ensure that people will be more hesitant in investing. The government has experimented with first home buyer grants that do not seem to have done much to help young people get in, but to now punish investors with larger fees almost seems like a double hit. 

6. Sellers to lose out.

Ultimately, the biggest loser could be the vendor. The vendor in truth does not really mind who buys their home, they want to sell their home to the person who has the most money. Therefore, if vendors find that less investor action is being taken on their property, prices are likely to flatline and they are likely to lose a part of the market that otherwise would have been interested. 

What do you think? Do you think differential loans are a good idea?

Let us know below.

About the Author:

Todd Schulberg

Todd Schulberg handles all things marketing for - Living and breathing property, Todd has a keen interest in the movements in the market and how agents can utilise new tools and technology in order to be more connected. Using all things social, Todd suggests different ways that agents can engage and think outside the square with their marketing approach.

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