JP Morgan warn low deposit property investors on looming Basel 4 impacts

JP Morgan warn low deposit property investors on looming Basel 4 impacts
JP Morgan warn low deposit property investors on looming Basel 4 impacts

Even if the Reserve Bank of Australia keeps the cash rate steady, a JPMorgan Mortgage Industry Report has warned young property investors who are "materially dependent" on income generated from renting their property could face higher rates in the coming years.

It will occur as banks respond to global regulatory changes that will require them to hold higher levels of capital against such loans.

The report published by JPMorgan says Basel 4 will require banks to hold up to five times the amount of capital against investor loans materially dependent on rental income to repay the loan.

It was speculated this could lead to interest rates for loans to investors with deposits of less than 20 per cent rising 3 percentage points, lifting from the present rate of about 4.5 per cent to 7.5 per cent.

The international Basel 4 reforms, which are expected to be finalised soon and adopted in Australia in the coming years, require banks to carry capital based on loan-to-value (LVR) ratios rather than the probability that a loan will default.

So far the definition of "materially dependency" has been left vague by the Basel committee. According to analysis by JPMorgan and Digital Finance Analytics, property investors have already been hit by higher interest rates as banks try to avoid running into investor loan growth caps of 10 per cent imposed by the prudential regulator in late 2014.Since mid 2015, investor and interest-only loans had increased an average of 65 basis points.

JPMorgan analyst Scott Manning said these increases were just the beginning.

"We think the repricing we have seen to date ... is purely a toe in the water, [with banks] testing the elasticity of the market [and] the response from brokers and politicians," he told The Australian Financial Review.

There is a lot more pricing differential to come through the market ... [and] we can definitely see the prospects for significant amounts of refinancing."

It is tipped ANZ Banking Group would be the biggest beneficiary among the major banks of Basel 4, because it has the lowest market share and slowest growth rate for investor lending. The report co-author Digital Finance Analytics' Martin North noted banks do not necessary capture all expenditures that households have.

"There is more work to be done to capture the cost of living in households.

"Even with a small rate rise, more than 50 per cent [of investors in this categories] will struggle if there is a small rise in rates say up to 3 percent."

North warned the Australian investor market was "growing way too quickly" despite the 10 percent growth rate cap imposed by APRA



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