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shutterstock_124509472In recent times, investor finance has been growing at a rapid double-digit rate and, because of this, now makes up approximately half of all new settlements. This disproportionate surge in investor home loans is posing housing affordability issues and may soon spur action amongst economic regulators.

Australian banks may soon be faced with lending restraints as the Reserve Bank of Australia (RBA) and the Australian Prudential Regulation Authority (APRA) consider the use of macroprudential tools to restrain investor lending.

Several macroprudential tools have been discussed to curb investor borrowing, including Loan-to-Value ratio (LVR) limits and increased serviceability buffers for investors.

Lower Loan Value Rations (LVRs) aim to restrict the proportion of new lending, at higher LVR ratios. These limitations have previously been used in New Zealand, where limitations were forced onto banks to limit residential mortgage borrowing for LVRs higher than 80 per cent to no higher than 10 per cent of the dollar value of their new house borrowing flows. The objective of this is to decrease demand for housing, and ultimately the resulting pressure on sky rocketing house prices.

Evidence from international housing markets however suggests that the effect of these measures is minimal. The reason being that investors have a reasonable amount of equity in their property and are in fact not high LVR borrowers in any case.

Interest rate serviceability buffers evaluate an investor’s capacity to repay repayments on their loans and may be another measure used to restrict investor borrowing. An increase in serviceability buffers will mean borrowers have less capacity to lend due to increased servicing requirements set by the lenders. For example if the RBA implement a strict 3 per cent buffer and banks are offering a mortgage interest rate of 5 per cent than the bank will not approve a loan unless the investor can prove they have the capacity to make repayments at the rate of 8 per cent.