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April 2017 RBA Update

The word Interest

What's happened?

Yesterday the Reserve Bank of Australia (RBA) met for the third time this year and left the cash rate unchanged at 1.5%. Philip Lowe, the RBA Governor states that 'conditions in the global economy have improved' and that the 'Australian economy is continuing its transition following the end of the mining investment boom'.

He also stated that the 'outlook continues to be supported by the low level of interest rates' and that lenders have 'recently announced increases in interest rate, particularly those for investors'. The Governor also noted that 'a reduced reliance on interest-only housing loans in the Australian market would also be a positive development'.

What does this mean?

As we've seen in the past few weeks lenders have increased interest rates for investors outside any increase of the cash rate by the RBA.

This would seem to be driven by the APRA decision last week to force lenders to further limit their exposure to investment lending by limiting the flow of new interest-only lending to 30% of the total of new residential mortgage lending and require stricter limits for loans where the loan-to-value-ratio (LVR) is over 80% and added scrutiny and justification of interest-only lending where the LVR is over 90%.

It would appear that as lenders have increased rates recently, this would have given the RBA room to leave the rate unchanged particularly in the light of the APRA decision last Friday.

The recent ASIC review of lending in Australia would appear to have reinforced stronger lending controls in the RBA"s opinion as the statement read that 'the recently announced supervisory measures should help to address the risks associated with high and rising levels of indebtedness'.

There are many situations where the tightening of the controls around lending may feel increasingly restrictive but these benchmarks and standards serve to protect borrowers against difficulty keeping up with repayment throughout the life of the loan as well as ensuring that the lenders are able to maintain their lending capability through market fluctuations and inflation impacts.