Another week, another tightening by lenders . . .

CBA tells interest-only borrowers to wait six months for new funding

Will this have a material effect on anyone here?

 

This is just closing a CBA closing a credit loophole. Skinny on servicing - go P&I and then swap it to IO once it settles. That doesn't make much sense.

Its barely AFR worthy IMO (suitable to broker news), but given its CBA and there's a tide of these articles, makes the papers.

 

How comfortable has society become with debt. Interest only should be made illegal. Having no intention of paying off a debt is irresponsible from the lender and the borrower.

 

Care to elaborate on why interest only loans are irresponsible? There's plenty of good reasons to take an I/O loan which involved detailed and astute planning.

Granted I/O loans are now more expensive and this becoming harder to justify financially, but this doesn't make them irresponsible in themselves and it's an external influence causing this.

 

IO because you can't afford the P&I payments on your home is irresponsible, but in the context of a well thought out and structured investment strategy, IO can make perfect sense.

 

Even government in the latest budget announced there are different debts. Bad debt, good debt and let's say necessary debt.
So bad debt is classified as debt that is spent on consumer products, no assets of values backing it, hence pools, cars, holidays, clothes. Good debt is classified as debt on assets that hold value, such as property, land, perhaps collectibles, even their infrastructure spending they now classified as good debt since it may create more jobs.
Necessary debt is probably for your property that you live in, while it is unpaid.
I would suggest a top down approach, rather than bottom up approach, where we start with all the governments in the world being first accountable and responsible for their debts. Most people are unconcerned with the debt levels in our world, yet we are so concerned about personal debts?
Perhaps equality for all, P&I only debt for business start-ups, ventures, government debt, etc..
I treat my property as a business where I provide roof over peoples' head, like any other business that provides a service or product, so why am I to be treated differently from tax point of view or debt?

 

From a fin stability perspective, there's definitely merit in winding back IO loans (or not having them in the first place). IO loan setups does promote leverage, creates additional individual credit risk (less so on a diversified scale), etc.

One of the key reasons (as well as offsets, LVRs, etc) that Australian's have a higher debt levels on individual balance sheets than most of our international competitors. Its not part and parcel of all financial systems across the world. When the IMF's fin stability team come to town and conduct their FSAP's (fin stability assessments and cross country comparisons) they do question this, particularly behind the scenes more and talk about experiences in other countries.

On the whole though, credit has so far been allocated reasonably well & has positive spillovers. Overly cautious approaches to lending constrain growth and entreprenuership. Its a balancing act, not sure where IO sits on the scale. To date, hasn't caused too much harm, but that can change & it has added a lot of 'risk of harm' to a system.

Nonetheless, this particular change doesn't really push in the direction of IO banning. Its just a CBA loophole being closed. Brokers who do biz with CBA will know that this was just a way to get tight servicing to work. It didn't make any sense for credit to approve a loan under certain conditions, only to have them change the day after settlement.

 

I don't think there's any merit in making it illegal - interest only serves a purpose if used correctly. Using it for an owner occupied loan for the sole purpose they cannot pay the P&I amount is irresponsible, using it as you have a mix of personal and investment/business debt and there's significant tax reason to pay certain debts before others makes good sense to have IO.

As per the article - as others have mentioned its just extending the IO switch point from 3 months to 6 - which was put in to remove the servicing loophole. Whilst marginal, it did mean that people could scrape through with some loans and then flip straight to IO.

The article is poorly written and doesn't accurately describe the changes - I have a feeling the journo probably didn't accurately understand what the changes and impacts are with this.

 

It's merely a tool, perfectly legal and anyone can access it...or not.

It has helped me to elevate my miserable life from one destined to being a pensioner, to one of financial independence at retirement (hopefully ).

I have taken the strategy of IO as much as possible; but have tried to smash the Principal along the way as conditions allowed.

You should see how I butcher my LOC's!!

 

The right way to use IO loans is on investment properties where the purchaser still has monies owing on their principle place of residence.

You take the funds saved lower IO payment and apply them to the PPOR debt which is non deductable. Leaving the higher debt on the Inv property which is tax deductable. Thereby the overall debt position is not any worse off. More equity in PPOR less in Inv. But the clients tax position is maximised.

This is only suitable for clients that are disciplined enough to do as planned and not take the savings to the pub/shopping.

 

My apologies about the late reply. My son brought home a gift from daycare. One could describe it as the closest feeling to dying whilst remaining alive.
To clear up my statement I agree with Jess's statement "IO because you can't afford the P&I payments on your home is irresponsible"
Our current development is IO so I'm a hypocrite. I consider myself to be a responsible lender but how many out of 10 are not? I feel the borrowers, lenders and brokers who do the wrong thing will ultimately send us all south.

 

Nice to hear a financial independence story.... huge achievement. Good work

 

Agree, should have been clearer with my statement

 

Edit - Actually - just re-read that - was it man flu?

 

haha, I wish Jess. This week proved to me three things;
- daycare is a necessary evil (evil part being sickness)
- im happy I pay tax (no tax, no public healthcare)
- we live in the luckiest country on earth

 

+100

 

hence the rest of the world is desiring to live here.

Did someone say property market will crash n burn?

Wonder how the recent tightening is affecting "the market" right now?
One would have to think it has affected a few who are selling to get the books back in order.

They need to be careful tightening too fast and too far.
Property market is a big contributor to govt coffers, let alone the banks...