Extending IO terms - Crystal Ball Gazing

Discussion in 'Loans & Mortgage Brokers' started by See Change, 27th Jun, 2017.

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  1. See Change

    See Change Well-Known Member

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    The nastiest potential speed bump we face , would be if we were unable to extend the IO periods on ALL our loans . I've crunched the numbers and we would cope , but only just and I'd probably have to work longer hours , which isn't what I want to do at that stage.

    This isn't going to happen for a while and we have several options available to mitigate the impact if needed

    Any one got like to post their latest thoughts on what may happen further down the line .

    My take is that at the moments the banks are readjusting their portfolios , but once they're down to their target profiles then they may take the brakes off to a degree . This is typically what's happened in the past .

    Cliff
     
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  2. Starbright

    Starbright Well-Known Member

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    Rate cuts seem likely as IO rolls off. AUD falls.
     
  3. Gockie

    Gockie Life is good ☺️ Premium Member

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    Just taking a stab. I reckon you could still continue IO but at sharply higher rates? Which would entice many to either go to P+I or sell.
     
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  4. Tattler

    Tattler Well-Known Member

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    It would be serviceability that will be an issue, with the recent tightening of serviceability. No matter how high IO rate is, it would automatically go into P&I if you cannot refinance or get IO extension.
     
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  5. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    I called this a ticking time bomb last year
    Loan Tip: Ticking Time Bomb of Interest Only Loans Expiring https://propertychat.com.au/communi...e-bomb-of-interest-only-loans-expiring.10079/

    And it is getting closer to the explosion point which will be sometime within the next 5 years probably.

    Many will be able to wear it, but probably many more will be caught out and this could lead to people attempting to sell.
     
  6. See Change

    See Change Well-Known Member

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    We have a couple of properties that take more topping up than others . One we could sell with a small profit ( 50 K ) and the other around break even . The other one that will have the biggest increase has an LVR of 37 % so I'm sure we would be able to sort something out with for that .

    From what I've heard it's still possible to borrow with 80 % and P& I with lower rates , so that might be an option .


    yep , that's obviously the issue . Lots of possible scenario's and we have plenty of fall back positions and buffers .

    Really wondering about peoples medium , long term view esp from any of the MB's .

    Cliff
     
  7. See Change

    See Change Well-Known Member

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    Hi Terry

    I read that post , it's around a year ago and you'll note I posted on it .

    This is more for an update on peoples current thoughts .

    Cliff
     
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  8. Lacrim

    Lacrim Well-Known Member

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    Why its different now is that the changes have been enforced by APRA. Can't remember the last time, if ever, that a mandate and such a radical one has come down from the top.

    I've done the calcs on all my loans going P&I. It's not pretty. Even if IO rates are higher, they are a fraction of what you'd pay on a lower P&I rate with 25 yrs remaining. Scary times and unforeseen/unprecedented.

    I think some PC members are sleepwalking through these changes talking about where to buy, what to buy etc., Perth/Brisbane looking good etc. This is THE biggest challenge in our path right now and it affects just about EVERYONE with a sizeable portfolio or wanting to expand it.

    I admit I was too but the penny's dropped in the last week. I'd be more than happy to trade in my negative gearing rights to avoid this onslaught. We are talking about an implication in the tens of thousands overnight depending on how many props you have.

    @Terry_w give us some viable mitigations!
     
    Last edited: 27th Jun, 2017
  9. Anthony Brew

    Anthony Brew Well-Known Member

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    For us newbies who have no seen this before, can you give us a little insight into what you have seen in the past that they did to put the squeeze on investors or debt reduction, and how it played out at that time?
     
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  10. Jess Peletier

    Jess Peletier Mortgage Broker & Finance Strategy, Aus Wide! Business Member

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    My thought is that the ease of getting IO is over for a good long time. Not only do banks need to reduce their current IO levels, they also have to stay there which won't happen if IO is made to be too attractive.

    If you have a large portfolio, start making plans for managing the IO terms. We've all been talking about this for around a year, but now it's getting real.
     
  11. Lacrim

    Lacrim Well-Known Member

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    I've seen individual banks vary their policies but not APRA in all my years of investing. Happy to be proven wrong.
     
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  12. Lacrim

    Lacrim Well-Known Member

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    They can't SC - it's not their call, that's the problem. And the targets are so aggressive there's no room for generosity or loyalty to longtime customers. Bank profits will always come first, along with adherence to the rules.
     
    Last edited: 27th Jun, 2017
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  13. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    At every opportunity extend your loan terms back to 30 years as the longer the loan the lower the minimum PI repayments.

    Keep cash in an offset account attached to an IO if you have a choice. Not only will the repayments be lower but there will be interest savings with the higher IO rates.

    Extend all IO periods now for as long as possible.

    Build up cash buffers so you can handle the sudden increase in repayments when it happens.

    Consider related party loans to help with cash flow (if needed).

    Try to get the lowest rate possible.

    Borrow against the main residence for the investment loans.

    As a last resort consider selling before well before you may need to.
     
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  14. Lacrim

    Lacrim Well-Known Member

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    I'd be happy to do the first Terry, and cop all my loans being P&I (eventually) with 30 yr terms..but with the banks assessing loans at 7.25-5%, serviceability is going to be a major issue.
     
  15. sash

    sash Well-Known Member

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    No surprises....I have locked mine in for 10-15 yr I/O terms....you better have an exit plan..otherwise have a very large buffer..I mean large something like $1m plus.......or a very larget CF!

    This is going to kill people...mark my words....it will be the most pronounced in Sydney and Inner Melbourne......this is not scaring people it just calling the way I see it.

    Here are my plans in order of priority:

    1. Slowly take profits and sell down
    2. Convert to PI on properties which I have held for 10 years plus thus having a 20% return
    3. Pay down debt agressively

    There are some real smart alecs on this site who have made a lot of money in Sydney...but they are now face the trifecta of pain:

    1. Higher Land Tax due to increased prices over the last few years
    2. If they sell they are destroying wealth because they are carrying 500k plus gains....unless you are into tax fraud you will pay 125k for the priviledge
    3. I/O expires...on loans more than 300k it is going to hurt

    So people might justify that they made 10% more since 2015......that will rapidly disappear when the market corrects and the extras as per the trifecta....

     
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  16. sash

    sash Well-Known Member

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    Yep...that is brilliant plan developed by the gobbermint to stuff investors......and some OOs.......where there headaches...opportunities appear! Awesome!
     
  17. Lacrim

    Lacrim Well-Known Member

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    Have you run the numbers on your portfolio Sash ie IF you had to pay P&I on all your loans simultaneously, could you continue to hold without selling?
     
  18. sash

    sash Well-Known Member

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    Yep.....thought my positive CF would be stuffed..would drop to 30k .the upside is by selling -1-2 a year...my massive depreciation allowance would essentially those massive CG bills.

    There is reason to go for the middle of the road properties rather than poor return bluechips...I like a balanced portfolio....
     
  19. Ghoti

    Ghoti Well-Known Member

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    Perhaps an upside to being a recent entry to the property investment game is that I only have a single IP at this stage. In any event I am currently seeking an extention of the IO period out to the ANZ bank maximum of 5 years. In the meantime we are are paying the difference between IO and P&I into the PPOR offset account.

    So overall debt reduction is the same regardless of IO vs P&I, its just the deductible interest that varies.
     
  20. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    This is a great discussion have and for people to think about well in advance. I don't think there's any single solution that's going to suit everyone. Solutions may go from simply tightening the budget and sucking up the extra repayments, to selling a property to reduce debt elsewhere.

    Extending IO can work sor some borrowers this can work but an exit strategy is required.

    * Serviceability might allow borrowers to refinance to another lender at the end of their IO period. Resetting the loan to a new 30 year term improves things and starts everything all over again.

    * In a larger portfolio having IO repayments for an extra 5-10 years might allow some property to grow in value to the point where it can be sold to reduce debt on the rest of the portfolio.

    The problem with continually extending IO periods that if you can't refinance, can't extend again and aren't in a position to sell, the longer the IO period, the worse the cash flow hit becomes when the loans do become P&I.

    The best recommendation is that people should be assuming P&I repayments from day one, but save the surplus cash flow into an offset account or to reduce non-deductible debt. Reducing non-deductible debt can also increase cash flow (by way of a smaller non-deductible loan), or funds in an offset account can later be used to cope with the higher P&I repayments.

    Unfortunately people usually take IO repayments as a way of improving their cash flow but then don't use this opportunity to either save or reduce other debt. It's quite frustrating when people tell me that they want IO repayments because they don't feel they can afford P&I. If you can only afford IO, then at some point you may not be able to afford the loan at all.

    At some point, borrowers probably need to assume that their loans will become principal & interest.

    The sooner this is planed for, the more manageable it will be. Even if this means switching some loans to P&I earlier.
     
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