Mortgage rate gap between owner-occupiers and investor home loan rates shrinks

The rift between owner-occupier and investor mortgage rates is narrowing, and investors can expect this to continue as new investor lending dwindles.

Investor borrowers could be paying up to 0.49 per cent more in interest rates than borrowers who live in their own home, according to RateCity analysis.

But two years ago, the maximum gap between investor rates and owner-occupier rates was 0.60 per cent.

Looking at overall rates across fixed and variable, the difference between the average mortgage rates for owner-occupiers and for investors is as small as 0.22 per cent, down from 0.32 per cent in August 2018.

Lenders have been ramping up the home loan rate war, but this hasn’t been limited to owner-occupier interest rates.

In the past two months, 47 lenders have made out-of-cycle cuts to interest rates for investor borrowers, RateCity figures showed. The last time the Reserve Bank of Australia (RBA) lowered the official cash rate was in March.

Among the lenders which slashed their investor mortgage rates were NAB, Macquarie Bank, Bank of Queensland and online-only lender Athena Home Loans.

Why is the home loan rate gap narrowing?

While many are used to seeing investor mortgage rates being higher than owner-occupier rates, Sally Tindall, research director at RateCity, said this hasn’t always been the case.

“Prior to 2015, most banks charged a flat rate for each home loan product regardless of whether you lived in your home or rented it out,” she said.

This changed when the Australian Prudential Regulation Authority (APRA) asked banks to cap the growth in investment loans to 10 per cent a year, due to a rise in investor loans that concerned the regulator.

“APRA’s cap on investor lending has since been removed and while investors are still paying more than owner-occupiers, the gap has narrowed as banks move to welcome investors back on to their books,” Ms Tindall said.

But growth in investor lending has been slowing. New investor loans are down by 29 per cent from the same time two years ago, according to the Australian Bureau of Statistics (ABS). This is equivalent to a $1.8 billion drop in investor lending compared to June 2018, Ms Tindall said, which is creating a hole in bank revenue.

“With a shrinking pool of new home loans, banks are being forced to compete harder for the ones on offer, including any existing investors that they can wrangle away from a competitor. As a result, we’re increasingly seeing record low investor rates on offer for new customers,” Ms Tindall said.

Will the gap between investor rates and owner-occupier rates keep closing?

Ms Tindall expected the interest rate gap between investor and owner-occupiers to continue narrowing.

“It’s a very different environment to five years ago when banks were actively discouraging new investor loans. It’s also one of the few loan types that still has fat to cut when it comes to rates,” she said.

While Ms Tindall said this competition is an advantage for investors, especially those who are in a position to refinance, they should not expect banks to approve any investment loan.

“They’re going to want quality investments, ideally where the rental return is still strong and the owner has a good track record of paying their loan on time,” she said.

What should investors do to take advantage of the current environment? 

Existing investor borrowers who have locked in their interest rates overpaid the most on their mortgages in June compared with new borrowers, the latest RBA data on housing lending rates suggested.

New investor customers on fixed-rate loans of three years or less are paying 1.01 per cent less than old customers on the same loan type, while existing customers who are locked in for longer than three years are paying 0.95 per cent more.

With this in mind, some investors may be wanting to refinance. But those looking to buy a new investment property or refinance their investment mortgage should be prepared to go under the microscope, as it’s anticipated that banks will be increasingly cautious about the amount of income a property is likely to generate. This could affect how much an investor is allowed to borrow, and may even deter some would-be investors from dipping their toes into the property market. 

Despite the increased scrutiny, investor home loan rates are among the lowest the market has seen, with Homestar Finance providing the lowest variable investor rate on the RateCity database at 2.49 per cent (2.52 per cent comparison rate). For fixed investor rates, UBank has the most competitive option at 2.29 per cent (2.74 per cent comparison rate).

Investor rates from 27 lenders have dipped below 2.5 per cent, while 92 lenders have investor rates below 3 per cent. 

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