Bank Calculators IO v PI

Discussion in 'Loans & Mortgage Brokers' started by Danny370z, 2nd Aug, 2017.

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  1. Danny370z

    Danny370z Well-Known Member

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    Hi guys i am currently refinancing and we all know that banks are now pushing us away from IO i have been hearing that IO loans are now being calculated on 25 years thus reducing borrowing power, could a broker clear this up ? So with rates up for IO now a reduction in borrowing could this mean that PI is the better option?
    Cheers DA
     
  2. Brady

    Brady Well-Known Member

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    If your contracted loan term is 30 years, but you select 5 years IO, the bank will assess based on 25 year loan term - as the first 5 will be IO and balance won't be reduced.

    If you went 30 year loan, 2 years IO would be based on 28 and so on.
     
  3. Danny370z

    Danny370z Well-Known Member

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    Yes this is how i understand it but i have heard that the banks have changed the way they would normally calculate your loan in past few months post APRA . Do you know of any recent changes?
     
  4. Corey Batt

    Corey Batt Well-Known Member

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    They've always done this for loans being applied for - for existing loans the changes depends on the lender. ie for some lenders they've always calculated things this way and were seen as ultra conservative, others would just look at the repayment you made per month, others would load up that repayment by an amount to factor in potential rises (ie if your repayment was $1000 a month, they might calculate it at $1200 as a buffer).

    There's no one policy change, as each lender calculated it differently. The general theme however is now that lenders are moving in line with more consistent methods of calculating debts if they're regulated by APRA.

    What this means is with the new conservative calculations that your capacity will be higher with P&I repayments, whilst inversely you will severely reduce your borrowing capacity with the most generous lenders for investors so there's no right answer.

    If you want to play around with extending capacity as far as possible - you would borrow the initial properties with conservative lenders at IO rates until your capacity was near exhausted, then move to the generous lenders for further purchases until they say no more. From there you could switch any loans to the cheaper P&I rates as you're not going to be borrowing further in any case and should hopefully have paid down your owner occupied/non-deductible debt.

    Sound easy? In reality everyones circumstances are different and that suggestion may suit 5% of people - best to get an investment focused broker who can come up with a tailored solution based on your needs.
     
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  5. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    Most lenders calculate existing loan repayments based on the period they'll be paid off. This figure is higher for an I/O loan for the reasons already explained, hence an I/O loan reduces your borrowing capacity with most lenders.

    Most lenders already had this in place prior to the APRA regulations. The regulations simply prompted most of those that didn't use this method to adopt it. There are still some lenders who use alternative methods, but most of these are likely to change in the near future.
     
    Last edited: 2nd Aug, 2017
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  6. Dan Donoghue

    Dan Donoghue Well-Known Member

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    Wait what? I'm confused, the IO repayments on a 1, 10, 20 or 30 year IO loan will be the same because it's IO.

    P&I it would make a massive difference, the longer the term the lower the monthly payment but the higher the overall payment.

    Edit: Just read a few of the replies, are you referring to an IO introductory period on a P&I loan?
     
  7. Danny370z

    Danny370z Well-Known Member

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    Ok maybe this is what i am hearing, the adoption of the rule more than changes :)
     
  8. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    A loan is usually 5 years IO, with a 30 year total term. After the first 5 years it reverts to P&I repayments, calculated on the remaining 25 years.

    If you have have a 15 year IO period (which is almost impossible to get these days), then the loan will be assessed based on a 15 year P&I schedule. As you say, the longer the IO period, the harsher it will be in the long run.
     
  9. euro73

    euro73 Well-Known Member Business Member

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    These changes started several years back, with APRA/ASIC Round 1.

    APRA became extremely concerned about the rapid escalation in I/O volume being written by lenders. It had reached 53% of all lending by late 2014/early 2015. They wanted to slow the volume of I/O lending and get it back to more traditional levels.
    So APRA introduced a requirement for banks - they were asked to adhere to a 10% I/O "speed/growth limit"
    At the same time, ASIC jumped into APRA's ear about getting the lenders to start taking responsible lending practices much more seriously. This resulted in lenders being required to start to use sensitised assessment rates when calculating your borrowing power, and updating their 1970's household expenditure models to 21st century ones.


    We have just commenced APRA round 2. The regulator isnt satisfied that Round 1 did enough, fast enough...its only resulted in I/O volumes dropping from 53% to 46%. So now there is a quota in place where banks are only allowed to make 30% of all lending available on an I/O basis.

    This is a HUGE change, and it's why you are seeing - and will continue to see, the following;

    Reduced LVR's for I/O
    Reduced I/O borrowing power
    Reduced maximum I/O terms
    Reduced probability of renewing or extending or refinancing I/O loans
    Increased rates for I/O
    Increased probability of being "nudged" to P&I after said reduced I/O terms expire


    However you look at it, the quota means the banks have to shed a LOT of I/O volume. The various levers available to lenders - whether big, small or in between - are pricing, LVR and policy. They will use a combination of the three to meet their 30% quota limits.

    Given the fact that @46% of all lending was I/O prior to July1, when the APRA #2 took effect, and that doesnt include any new demand... it shouldnt take a genius to figure out that the banks need to shift massive amounts of I/O borrowers over to P&I.

    Long answer to your question I know, but I believe it's important that readers actually understand why this is happening and why it will continue to happen, so that those still living in hope that its temporary, get a reality check and stops resisting the new credit environment, but instead start accepting it and start recalibrating accordingly.

    In a nutshell , unless you have received a pretty healthy pay rise or paid off a healthy amount of debt, you can borrow much less today than you could pre APRA. And that position will become even more the case in the coming months...

    So debt reduction is key now, moreso than its ever been for any previous generation of investors. The quota is a complete game changer for the "buy, hold, harvest equity to go again" model. The "buy, hold, reduce debt to go again" model will be far better suited to the new credit environment.

    All of my clients have one or more cash cows in their portfolio, and they are using the surplus CF to pay down debt. Thats one advantage. But the other advantage is that they can all absorb either higher I/O rates or P&I, or both - if push came to shove. Sure,it's not their preferred outcome, but its far better than drowning.

    I run my portfolio like a business, and I teach my clients to do the same. When the business has its biggest expense (interest) increasing and likely to increase further , I'd be a fool not to inject additional income into the business to begin to deleverage and to hedge against further increases to my interest costs.

    Understanding the APRA
     
    Last edited: 2nd Aug, 2017
  10. Dan Donoghue

    Dan Donoghue Well-Known Member

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    Thanks mate, great explanation as always :)
     
  11. LoanSharkJR

    LoanSharkJR Well-Known Member

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    That just makes sense. Well said.
     
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  12. euro73

    euro73 Well-Known Member Business Member

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    Mortgage warning: 8 per cent is the new 17 per cent

    The facts are the facts.... paying down non income producing, non deductible debt is the smart move. if you dont have any of that kind of debt, then starting to pay down deductible debt is the next step.
     
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