Interest only investors hit hardest by rate hikes

Research released by RateCity.com.au has questioned the effectiveness of hiking rates to deter certain buyers.

RateCity.com.au analysed of over 100 lenders two months after the latest APRA intervention and found the majority of banks are penalising investors and interest-only borrowers by as much as 0.56 percentage points.

RateCity.com.au money editor Sally Tindall said investors paying interest-only are being hit the hardest at an average rate of 4.88 percent while owner-occupiers doing the right thing by paying down their debt are being rewarded with an average rate of 4.31 percent.

"While promoting sound lending measures was fundamentally important, there were question marks over the effectiveness of hiking rates to deter certain buyers," she said.

“What we learnt from the 2014/15 APRA intervention is that while a rate rise spooked investors initially, they took less than six months to decide that paying extra was worth their while.

“The real test for investors will be whether they are willing to meet their bank’s demands for higher LVR’s if they want to pay interest-only.

“Owner-occupiers opting to pay interest-only are also being hit with slightly higher rates, however it pales in comparison to the bill they eventually have to pay as a result of not paying down their principal without the benefit of any tax concessions.

“The average mortgage holder with a $350,000 loan will pay $45,822 more to their bank if they opt for interest-only repayments for the first five years.

“That’s a pretty big deterrent right there."

The research showed that people with a deposit of just 5 percent were paying, on average, 0.18 percentage points more than people with a deposit of 30 percent.