120 Billion coming the P&I way

$120bn of interest-only mortgages to go P&I

The Reserve Bank of Australia has disclosed that $120bn of interest-only (IO) mortgages will be transferred to principal-and-interest (P&I) loans over the next three years. Given that many borrowers would not qualify to refinance under the stricter lending criteria, many could be forced to pay up to 40% more for their loans.

Regardless of the potential consequences, this directive might bring, Australians are not entirely losing their grip on IO mortgages. In fact, a new study from customer-owned Gateway Bank showed a splitting sentiment on the loan type, with 50% of Australians believing that IO home loans are bad, while the other half perceiving them to be good.
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Read More - $120bn of interest-only mortgages to go P&I

 

Its not 120bn over three years,
Its close to 380bn IO loans remaining which are set to expire till 2021 excluding the preemptive IO conversion.



RBA flags dangers of $480b in interest-only loan resets over the next four years

 

Almost half a trillion dollars in interest-only mortgages will convert to principal and interest loans over the next four years – jacking up monthly repayments for almost 1.5 million borrowers by as much as 40 per cent and creating a fresh threat to house prices.

In a sign of unease within the Reserve Bank of Australia about an unprecedented situation, officials for the first time published figures showing that around 30 per cent of all outstanding national mortgage debt will be subject to the reset, which has been likened to the wave of adjustable-rate loans that triggered the 2008 US subprime crisis.

While the Reserve Bank downplayed the likelihood of a US-style disaster, it admitted the resets are an "area of potential concern".

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Is this reset going to be Bigger than Ben Hur??

My Mortgage payments went up on a QLD property from 1900 to 3100 monthly!

So where do they get the 40% increase from?

1200 increase on 1900 payment is 63%

 

This has been talked about a fair bit.

Once you break down into individual analysis, its easy to come to the RBA's conclusion (something to watch, but not that big of a deal in aggregate).

You can break this down further to get a sense for how this may affect supply.

- If a borrower who has the same details as they did when they got the loan, then roughly 20-35% won't be able to EXTEND their interest only term if they wanted to with their lender. This is because lending standards are tougher today than 5 years ago. That is, 2/3rds of total borrowers are likely to just be able to extend their IO period on request if they wanted to. That leaves roughly $120 bn in IO debt that can't be rolled over in the next few years.

- Of that $120 bn, assuming the income/expense situation is the same as when they originated the loan, than the vast majority of loans will have non-bank lending options available to re-obtain IO loans. These banks are growing fast, partly because of this trend. The terms of these non-bank loans will LIKELY be better than the origination terms, albeit with a ~0-15% increase in repayment associated with higher rates.

So WHO can't extend their interest only terms?

• Very few borrowers in aggregate.
• Most likely advanced investors who are seriously over leveraged.
• Those that have had material changes to their situation (this is the big unknown).

Digging deeper, who will be forced to sell by a move onto P&I terms?

Those limited borrowers in the above situation & don't have adequate buffers.
So what total % of borrowers will be forced into sales? Our research (definitely not perfect) indicates it'll be around 1% of borrowers. This has a large upward bias though (given users of our system are investors).

In saying that, many others may choose to sell too given the cash flow impacts.

 

I agree - I keep on saying it, but most clients can refinance based on affordability.

One thing that is not currently too much of an issue, but may become one, is valuations. If values drop significantly (like in Perth, for eg) this might mean clients can't move not because they can't afford payments, but because there is no equity in the property. Things would have to drop significantly for this too be a big issue though but it's something that hasn't previously been considered as part of the discussion.

 

Interesting that as per your research out of total 480bn IO loan set to expire by 2021,
only 1.2bn IO loans (1% of 120bn) are likely to result in forced sale,

I would have thought rollover forced sale would be much more than just 1%, in excess of 15/20%,
It would be interesting to see arrears trend amongst IO2PI rollovers, if they capture that is.

The rate of fall in Nov month alone if extrapolated for sydney will be close to 14% yearly.

By end of nov18, sydney house price CL index fell close to 10% from its peak.
If you are discounting forced sales as a factor,
What do you think is the reason behind the rate and extent of these falls? mostly FONGO? (excluding usual suspects like divorcee / inheritance settlements etc)

 

Falling valuations is already an issue try extracting fresh equity.

 

So technically, there are 3 dimensions to this situation:

1) Ability to refinance (Income)
2) Valuations coming back (Value)
3) Affordability post refinance (Ability to pay back)

Point (1) is going to drive prices down quite drastically, due to Supply increasing.
Point (2) is self-fulfilling, and will also beat the Property prices down further.
Point (3) will create an affordability crisis which means fewer goods and services can be consumed leaving most of us Australians more vulnerable to an impending recession.

 

and its a massive issue for those where markets have fallen back and its not only the Perth market, very much ignored on PC

 

this is the nail in the coffin IMO and why we will see markets continue to fall

 

Does this analysis count offset balances as well? Or is it only taking the gross value of interest only loans outstanding?

 

It would be interesting to see the concentration of IO loans amongst portfolio investors of 3+Ips





Quite a few IO loans which is set to expire in Syd/melb originated in 2013/14 which means they may still be sitting on CGs, Would be interesting to see if they sell to capitalise of whats left in CG?

 

I totally agree with @Redom. In isolation of the headline it’s a very scary statistic but reality is for most people it’s not an issue.

They will either
- Extend IO periods with current or same lender because they have the capacity

- See it’s an optune time to start paying down some debt. I for example only ever had IO loans on my PPOR because why not? A large majority of my friends were in the same boat.
Some people like myself are switching over now because of the rate difference and some will just switch on expiration (a large majority of people probably don’t even know their is IO loading).

- For some it won’t be ideal but they will just reign in the Smashed Avo

- For others they will have large cash buffers and after all outgoings they may just need to pay a small difference from the offsets. This could last them years.

The tiny number of people that will be unable to refinance and can not afford the repayments will need to sell. This won’t be a drop in the ocean for housing prices, particularly given the staggered nature of the expiration periods.

 

Bring it on!

The property crash will create a bonanza!

I'll be eyeing the Ponderosa Ranch (a dilapidated 3 bedda sitting on 900 sqm in Letho).

 

That doesn’t create click bait though @Redom .. boring!

 

Most will not have the capacity to refinance ??? Reason why we are seeing downturn in market, investors not able to meet todays service criteria

I&P adds approximately 40% on loans, imagine the impact of this on investors who hold many properties

 

Not entirely
Their is simply less demand.

1 - Yes predominantly investors have taken a big hit to servicing but this isn’t to say they still don’t have capacity to refinance. It’s more they don’t have the capacity to leverage another 105% purchase with 75-80% rental shading. This has far more impact on servicing than an IO extension.

2 - Overseas investment has dried right up. This was a huge contributor to demand.

3 - General market sentiment. How many people are “sitting on the sidelines” that clearly have capacity? I reckon 90% of people on PC have capacity to purchase but are waiting it out.

And never forget we are all sheep to the media. They are playing a significant role in the market downturn.

 

House prices won't go back up in Sydney and Melbourne until there is a favourable macroeconomic shift... I just can't think of any in the next 12 months...

 

The main thing people forget.


Majority of the market didnt buy property between 2012-2016


So the guys and girls bought years ago even at IO dont really care. They are positively geared and with substantial discount in rates to move to PI dont give a **** to do so.


Yes IO to PI move is a great shift.

but FFS its not this cliff @TheSackedWiggle keeps panicking about in 99% of every reply in every thread.

Its a cliff its a ledge its Armageddon its nuclear war.

If the same 10 cliff worriers would put as much energy into investing as they do inr easerching the PI cliff they would be richer than Warren Buffet.

Very few Eternal pessimists are very wealthy and good investors. As Warren and watch every interview he is always optimistic about US economy.

APRA like the Fed will change to refelct condition in market over time as well so stop stressing.

Go do some YOGA drink some kale.....