120 Billion coming the P&I way

its not one or the other,
its all happening at the same time so the net effect would be much bigger then if that happened in isolation.

Just like the impact and extent of real expense was understated and now coming to front,
I think the assumption that quite a lot of investors (who wants to buy) are on side lines 'out of choice' rather 'being forced' will turn out to be overrated.

that was the catalyst for our boom and I doubt its returning anytime soon in a hurry.

That we are, and it goes both ways on the way up and on the way down
remember "now is the time to get in", "doubles in 7 yrs", etc

 

*Mic Drop*

 

I’m not sure if you are agreeing or disagreeing. Haha

 

No one will know the full impact, but watch this space over the next 12 months.

One thing I am certain of is that property markets will continue to soften, and this is not guess work as we are seeing this today due to this credit squeeze and why we are not seeing the hyped up threads on PC as market conditions have changed.

If you believe this is being negative then so be it. I have already been preparing for this and was able to convert a $1.2M loan that was going to revert to I&P to interest only, but not with the same lender. This loan would have cost me an additional $36,000 pa. Now that is just one property, imagine if you can not refinance? Not everyone can, this is the issue, and valuations stacking up? So what happens, investors may have no option other than sell? then what …. more supply comes to market.
Oversupply means markets fall, its not rocket science.

If you have an exit strategy don't wait too long, plan now.

If you think this is all doom and gloom then you are not paying attention to the facts

Interest-only borrowers flock to principal and interest home loan discounts

 

Discussion is not about those who can... its about those who can't as quite a lot of those who could, would have shifted thanks to penalising IO rates.

Why should I be stressed?
Are you?

Hows that going for you?

I have heard head in the sand works for some

 

mostly agreeing just emphasising its too early to discount IO rollover effect on top of everything else in play.

 

https://www.theage.com.au/business/...interest-only-home-loans-20181219-p50n49.html

Thoughts on this? What, if any impact does it have on the pending IO cliff?

I can't see it having a great deal of impact in isolation - serviceability doesn't change and neither does sentiment, although it may allow many to stay on IO if they qualify.

Is it likely to reduce the premium paid on interest rates charged by banks for IO?

 

This may be stop some forced sales if the banks can offer IO to those who would struggle to meet PI payments. Don’t see it encouraging speculating in the short term.

How long people can play the IO game untill wage growth catches up so they can pay down their debt is the big question or will new buyers with big mortgages be stuck in a worse than renting situation long term as they pay interest but gain no equity/wealth

 

Currently being discussed in another thread APRA lifting IO quotas....

 

Very interesting...and probably policy brilliance....APRA killed off investment in Sydney and Melbourne. Serviceability will still keep investors mostly out of these markets.

But the silver lining for Adelaide, Brisbane and Perth where prices and returns are still at 5%.......with I/O you should see a few more investors venture out...and perhaps also some FHB who might secure I/O only loans under an IP..and then change...should get very interesting.....

 

I was struggling to see the benefit due to the fact that serviceability hasn't changed but you make some valid points, and possible more competitive IO rate discounts.

 

Lol very funny.... head in sand

 

Ditto.....it won't be crazy but some growth exists.....

 

The banks won't offer IO to those who can't afford P&I - the loans are assessed on P&I, not IO with most lenders, so in reality it's not going to change a thing unless the way banks assess borrowing capacity eases up. That is unlikely, I would suggest.

 

Surely if some bad press comes out about people losing everything IO could be offered on a compassionate basis. Might actually be prudent in some ways if it saves some first homebuyers from forced sales in new estates

 

Much of this has actually already played out in the last 18 months, rather than it being a long run drag on housing market conditions.

- Total stock of IO loans of all mortgages is now approaching 25%. This is down from a peak of around 39% not too long ago (18-24 months ago). This is healthy and doesn't pose a systemic risk, at least in the regulators eyes.

- Interest rates on mortgages have fallen by around 100-150 bps over the past 5 years. That is, the cost of debt servicing is far lower today than it was when these loans were originated. In overall terms, the actual repayment increase associated with a 5.5% IO 30 year loan and a 4% P&I 25 year loan isn't very much. On a $1mill mortgage, its <20% increase ($700 per month). It's likely that incomes have improved enough over 5 years to cover this gap. That is, if you could afford it then, you can likely afford it now.

- While there has been a reduction in borrowing power from lenders over the past 5 years creating a 'vacuum' of borrowers who can no longer extend their existing IO terms, the vast majority of these borrowers would still have options to extend their IO term if they wanted to with non ADI lenders. Increased funding costs are marginal.

• That is, for MOST cases, if you could demonstrate affordability for a loan in 2014 lending conditions, you're likely able to extend your interest only term in 2019 if your situation is the same. Over the past 5 years, even in a low wage/rental growth environment, its likely incomes have increased ~10% too.
• Some insanely leveraged investors won't have options.

- If all existing stock of debt turned P&I tomorrow, the impact on consumption would still be a blip in the ocean. The RBA was concerned about this, but not so much anymore.

- And to top it off, the regulator no longer cares about IO debt and are happy with existing levels. IO is going to be marginally easier to obtain over time, extend & cheaper.

Summing it up, the IO2P&I is a small macro issue today. The adjustment has been made. At an individual level, yes it will continue to mean some refinancing and rebalancing of portfolios, marginal deleveraging for some (a lot has happened) & reduced cash flow for some too. But overall, its a small issue.

 

If you are discounting the effect of IO2PI rollover aka forced sales in forthy segments in 2018.
What do you think is behind the speed and extent of fall so far in sydney? (Sydney house price fall from peak would be close to 12% by dec18 as per CL index)

Normal profit booking by seller in absence of greater fool able to pay ever increasing prices?
Absence of buyer is one thing but why the rush to sell from sellers even at a paper loss?

 

There are already stories like this. If someone is bankrupt then keeping them running behind the car is only making it worse.

 

I didn't discount its existing impact, its has been big liquidity drain on credit and played a big role in the credit slowdown i think. I've explained it out in a series of posts before too, i personally think its had a much bigger drag on prices than accounted for now.

My point was that its impact has already played out over the last 18 months and will have a more limited impact in future years because it won't cause a massive supply increase. No doubt there'll be lots of articles about 'forced to sell my home because of P&I' next year, but this won't be a material overall shock.

IO loans have rolled over every year for the last 15 years+ so its not an unusual thing. But the sheer volume of 'rollovers' & 'adjustments' has happened in the past 18 months has been a big structural change in household debt. The adjustment that has already taken place is massive (and almost over) in a macro sense. 15% of the total stock of loans have moved from IO to P&I over the past 18-24 months. It was near 40% (wow!) and its now near 25%. I.e. A large rebalance of loan terms has already occurred, partly drying up liquidity and that has played a role in reducing demand this year, particularly from investors.

The key macro consequence of this is 'what level of IO loans is acceptable and where will it stabilise'. This adjustment has been made. It will END UP being near 25% in 2020, 2021, 2022, etc. The adjustment has already been made. UNLESS the stock of IO debt as a share of total levels around 15% (which won't happen, given new lending is more than this).

Therefore any further impact on future price movements of IO2P&I on a MACRO level will be limited at best. Reasons above. At a micro individual market level, some will be impacted of course. Investor hotspots mainly. E.g. areas where investors make up more than 40% of the market will be far more susceptible to IO2P&I mass forced sales.

 

Actually on second thought, can break the 2019 IO2P&I impact on prices out more specifically too. As explained in my above posts, most borrowers will have access to options when their IO terms rollover. But SOME won't. Who & what did they buy provides some clues as to areas that may feel the brunt of IO2P&I in 2019.

• In 2014, investors leveraged up a lot because it was a short temporary period where 'serviceability' wasn't tested properly by lenders. The key way to extrapolate this was by purchasing YIELD investments. If you got a yield above 5.5% then, your serviceability on whole wouldn't reduce from taking on debt. I.e. the more debt you take on, the greater your borrowing power would be. This was the MAIN flaw in calculators that led to single income investors getting 10 properties. Macro data suggests this investors took advantage of this - In 2013/14/15 - investment lending volumes skyrocketed & interest only loans skyrocketed. Investor boom.

So what properties & investors are likely going to be impacted; as a tip, troll through stories of investors who bought a load of properties (this forum, somersoft, investor articles, etc), during those years. It will serve as a good area to watch.

IO2P&I will impact these areas the most in 2019. These will be the investors who may be forced into distressed sales.

But on a macro overall level, the stock of IO debt will likely be similar next year to its current level today, so the impact of this 'rollover' will be limited at best.