Home owners with interest-only loans now increasingly under the pump

Not in their interest: The home loan borrowers that have been left out to dry

regulators have pushed the banks to reduce interest-only lending to improve the overall risk of consumers' debt to the financial system. But for those investors with interest-only loans, the chances of being unable to service them creates a new and unintended risk.

But these borrowers are particularly vulnerable because many of them took out their interest-only loans because they didn't have enough cash flow to repay interest and principal.

two segments most at risk for mortgage stress are younger families that are more typically first home owners that pushed their finances to get into the property market over the past couple of years and at the other end of the spectrum a more affluent group that took advantage of the rising property market and low interest rates to buy one or more investment properties.

 

I have a feeling the RBA will be cutting sooner than later but not sure if the banks will follow suit!

 

The "increased funding costs" line will get trotted out and they will up by .25%

 

Maybe investor loan interest rates will go up and OO rates will go down?

 

That's very true but on the other hand, a Royal Commission threat from the government seemed to have put them on guard. They are really under the microscope these days and i don't think they will be upping their rates this easily moving forward.

 

I wonder if the investor bashing would drive an uptick from rentvestors switching their loan purpose over to PPOR to get better deals. A repeat of when applicants would "accidentally" apply as a homeowner instead of investor.

 

I still have a couple of years left of my interest only loans and already putting the plans in motion for when the loans are converted to P+I such as renovations to maximise rental returns and increase my cashflow

 

This is now the theme of many threads, this is a massive trigger, combined with returns/yields at all time low.
Next we will see property markets go from bull to bear. Sounds negative, I know but just stating the obvious

MTR

 

Marisa to be honest, within my close circle of investors/friends, I'm not seeing the amount of panic and knee jerk reactions that is being reflected by some threads here. Some of them are consolidating ( myself included) to off set some risk and others are just comfortable with the buffers they have. Some have extended their plans to use smaller amounts of debt in a time period , sell , then take on more debt. I am just not seeing the kind of panic some posters seem to shout. Yes its a prudent time to make sure you have robust systems in place to manage various risks, but do we really need to panic in fear and behave like much of the stock market does....Me thinks no.

 

I guess its a property forum, but 6 months ago investors were far more interested on where to buy.

These threads perhaps an indicator that something is changing and it could be market sentiment, same as we have so many thread on shares, another indicator IMO. Buying shares requires less cash, investors are hitting the wall with loans, easy option would be to access equity for shares and allows them to move on. I could be wrong, just my prospective on it.

Its not all doom and gloom, most investors will continue investing, the sun will rise tomorrow etc etc.

I am certainly not in panic mode, but I think in the real world it will be dependent on debt levels as to whether investors will panic or not.

MTR

 

These sorts of comments show me that some/a lot of people are totally uneducated in finance structuring.

For anyone who wants to create wealth/finance independence, IO loans are one of the most powerful tools you have at your disposal.

It ****** me off that they are being blamed by Government (and others) and that their use is being restricted because some uneducated people have use this powerful tool in the wrong circumstances.

Do we stop the use of cars because people get injured/killed? No. We educate people, we build safer cars, ...

Why don't we do the same thing with finance structuring?

Restricting IO loans will make it harder for smart/educated people to achieve their financial independence.

Ah well, we will just have to make future tax payers bear the burden of this silly policy. Spending future taxes on this 'avoidable' welfare will take money away from schools, hospitals, etc.

Rant over.

 

Investors need to be mindful about the changes to APRA etc....but there are a tonne of banks and financial institutions that DO NOT need to obey by these. There is a bunch of groups that still today provide 90% LVR and interest only for the next 5 years.

Alot can happen in 5 years time and life goes on. I'm a big time investor in terms of the number of property I own and to be quite frank not worried a single bit. I have 4 years buffer as I have fixed all my I/O loans and some of the other are financed by non conforming lenders.

Obviously every investor needs to have a buffer but all this over reaction. Plus the government is not stupid. If they restrict investors too much their money tree will die. Just consider the amount investors pay in duties that help drive the economy, schools and healthcare. All this money taken away cannot be simply replaced. It a HUGE amount and everyone will suffer moreso the less fortunate.

 

Agree, that's probably the greatest use an investor can gleam from such threads --an insight into the mind of market players.

 

My current tenant in Perth split up with her husband and has nowhere for her or her 2 young children to live. The wait list for state housing is very long and without suitable and suitably priced rental accommodation, she would be homeless.

She is renting my property that I bought a few years ago. It was uninhabitable when I bought it and was on the market for 12 months prior to me buying it because no one wanted to buy it. I went to home opens 3 weeks a in a row and plenty of first home buyers walked in and walked out again. The property was simply too much work. It needed an experienced renovator like me to buy it and renovate it.

I am sure in some cases investors out bid people who want to buy a home.

But it's simply not true to say that every investor locks a home owner out of the market. It doesn't work like that.

The other side is people like my tenant who cannot afford to buy a home at this stage in her life and must rent. If it wasn't for rental accommodation, her and her young children would be homeless.

 

It is dropping rapidly...go read the latest census statistics. We are literally creating an unequal society. Negative gearing and capital gains tax exemption are incredibly beneficial to the already wealthy and we are giving huge taxpayer funded handouts to them at the detriment of those who aren't wealthy. Any argument to the contrary is just developed propaganda.

Broad based land taxes along with inheritance taxes would create a much fairer society but it would mean Australians would have to invest in productive assets not just land speculation and non-productive property.

 

Back in the 70s and earlier the Commonwealth government used to build and renovate homes for people who could not afford them. Now we spend that money and give it to wealthy investors. Thanks John Howard who started this mess by pushing for the change in the Young Liberals in the late 70s.

 

Hypothetically speaking, if property investors weren't around, and there was no rental accomodation owned by investors available, her partner might have to go bunk with a mate or she could bring the kids and go stay with grandparents. Either way there would still be accomodation options.

And if she and partner did own their PPOR, she would be well off after she gets sales proceeds from it and be able to put a deposit on a smaller place such as a unit or townhouse. There would be plenty of units and townhouse stock as well for her to buy or rent from, as without investors, many developers would likely have stock they retain as rental units or be selling at a discount to clear stock.

So really housing would be a whole different landscape if it was much more tightly regulated and not allowed to be traded like any other asset class and also if credit for property investing was not so easily available.

IMHO we do not need any investors to increase housing stock. If we had regulations that allowed ownership of only one PPOR per person, home prices would be low, likely most properties would sell at replacement costs.

Developers could still make money and be bringing more stock to market, as there would still be FHB or upgraders buying and land costs would be very cheap.

Also if each foreign investor were only allowed one new property only, then there would be excess stock for locals to buy at more affordable prices.

However states are very dependent on money from residential stamp duties, so it is very unlikely that the situation will change much. However it is encouraging that APRA is stepping in and hopefully will help ensure a more balanced property market where potential OOs will have a better chance to own.

 

Investors also pay the medicare levy on capital gains from their property. Home owners don't

 

If the government is allowing housing to be treated as an investment asset, then all home sales should attract CGT. Kind of a double standard to pander to the home owners with certain benefits and to pander to the investors with other benefits.

Should we then start requesting other assets be treated in the same way, having a CGT exempt class and a CGT class?

It like I have a nice big ROLEX watch made of GOLD and diamonds bought for 1million (capital asset). If I use it everyday, use it for work, use it at home, use it in all my waking hours and even when i go to bed, Should it be exempt from CGT if someone buys it for double the price after 10 years? after all , like my house, it is essential for my day to day living, and my left arm lives in it.

 

Generally I would agree. However, in my case the tenant is an immigrant and does not have a local support network. She was actually kicked out of her previous accommodation and needed to find a place to live within 2 days or be homeless. If we want to have a realistic conversation about this we must accept that there will always be a group of people who need or choose to rent and not stigmatise them.

Good example. There are very few investors in Perth right now but there is a lot of discounted stock on the market. Your hypothetical us the reality of the situation on the ground. My tenant will buy a property when she is ready but she needs a home to rent in the mean time.

That sounds extreme. Are there any countries that have done this and did it work? I can't see Australians accepting a total ban on property investment. Even the Australian Greens are not that extreme. Don't you think hundreds of thousands of vacant properties across the country are a bigger issue. If we banned vacant housing then maybe there wouldn't be a housing crisis?

I am sure the APRA changes will make things fairer. They seems sensible to me although a bit late in the cycle.