Existing loans to property investors are facing greater risks due to rising interest rates and narrowing refinance options, according to Moody’s. The ratings agency also warned that investors would default on mortgages more often than owner-occupiers if the economy weakened.

Offsetting these risks, Moody’s said the recent regulatory clamps on lending had improved the credit quality of new loans to investors and had slowed the growth in this type of lending.

Investors depend on a healthy rental market and rising house prices to obtain a good return, and these factors were sensitive to the state of the economy, according to Moody’s.

Towards the end of March, the Australian Prudential Regulation Authority (APRA) limited new interest-only lending to 30% of new mortgage lending by banks. This follows a 10% limit on growth in loans to investors introduced in 2014. These measures were credit positive for the broader economy as well as the mortgage market.   

But the restrictions mean there are now fewer refinancing options for investors, particularly those who’ve already taken out interest-only loans for five-year terms. Investors may struggle to obtain new interest-only loans once their current deals expire, and would be faced with the higher repayment costs of principal-and-interest mortgages.

Investors may also be forced to pay higher mortgage costs as lenders lift rates in response to regulatory pressures. These stressors would worsen during an economic downturn.

The default rate for housing investors has risen significantly over the past four years and is now worse than the default rate for owner-occupiers, Moody’s said.