Debt Bomb: Fears of housing 'fire sale' as interest-only loans roll into principal plus interest

Did anyone catch the 7:30 report tonight?

Concerns as interest-only loans roll over to principal plus interest

Fears of housing 'fire sale' as interest-only loans roll into principal plus interest:
Fears of housing 'fire sale' as interest-only loans roll into full repayment

 

I used similar language in 2016 Loan Tip: Ticking Time Bomb of Interest Only Loans Expiring

 

While the risk of P&I rollover is very real, I hate the way they use some mining town lemons to demonstrate it. If someone bought an IP in a mining town at its peak, he/she would be in a lot of troubles with either IO or P&I. As a lot of seasonal investors often say, you make most money when you buy. If you choose the wrong one, it will drag you all the way.

 

There is something call "refinance"

 

Has been covered at length on the forum. Makes a great headline!
Key theme is if you're an investor and not prepared for IO expiry, get a plan together...

 

The problem is that many are unable to refinance as the serviceability / lending criteria has changed post APRA reforms.

Many are in a position where lending was no problem before, but they are unable to technically borrow what they already have in the new lending environment.

 

Agree. Real estate (especially in Australia) is so emotionally and psychologically attached to most owner's psyches that they will beg, borrow and steal to hold before they sell. Which is a fantastic protective mechanism for all RE investors.

You don't see this same phenomena with stocks because the emotional connection is non-existent.

 

It’s also much more effort to sell a property, much more expensive. No ones going to do it on a whim.

 

that the beauty of the stock market when the fall out start and the margin call begins, you can buy some serious bargain that make you multiple times return when the market return to normal time

We haven't seen a fall out in Australia properties for the last 25 years, most only see price going up so the Jury is still out on this once but if and when it does oh yeah bargain time.

look at the explosion in IO loan that the sign that people only betting one way same goes with margin loans when margin loan hits a certain level in the stock market I take a short

 

All great points.

 

This is a silly premise. If over leveraged investors skimp on spending, the wealth effect translating into consumer spending is gone. One man's saving is another man's income. Job losses = Dec credit worthiness = Lower prices

 

Yeah nah.

 

And I don't think were gonna see it for another 25 years, at least not like stocks which can lose 80% in no time. Aussie RE imo will see corrections in markets, some larger than others but nothing close the volatility that can be seen with stocks.

 

I've done a bit of a review of my clients who have large portfolios. Those with 2-3 properties on IO aren't really at risk, but I have a few clients with more than 5, some more than 15, where this will likely be a problem.

The thing is, it takes quite a while to accumulate that many properties. They didn't put these portfolios together overnight. Also these clients aren't highly geared and in IO repayments, they're actually quite cash flow positive.

Some will take a significant cash flow hit and it will hurt. Others it will hurt but not put them into financial trouble.

For those that are going to see real cash flow pain they may have to sell some of their property. This provides quite a good solution as they have significant equity in all of their properties. Essentially the sale of one or two properties will allow them to pay off a significant amount of debt and get their cash flow back on track, at least under control.

These investors aren't going to sell everything, in fact it might only be 10% - 20% of their portfolio. They're not going to flood any market with extra stock.

 

To be honest I've seen my friends around me getting impacted by this p&i roll over.

A mate of mine had an investment loan of $1.4m just recent roll over from I/O to P&i, this means his repayment gone from approx. $4k a month turn into $7.5k a month........ When his rent was only getting $900/wk......

If he have been paying p&i from the start his repayment would be at least $1k less and with a much safer position for refinance if required.

 

IO2PI switch is an issue for those overleveraged Investors (OLI)
#. who can't repay even if they want to,
#. who can repay for now by stretching themselves but only for a limited period in hope, but in face 'No CG and low rental yield environment' for how long?



though IO2PI effects limited investors,
Credit tightening is across the board and has decreased everyone's #BuyingPower, so the risk of price trickling down across the board (with time lag and in differing proportions) is very real.

 

If all of the debt is in a single property, there's a good chance your friend would be able to refinance (and possibly get a better deal in the process). Perhaps not best to refinance with another interest only term, instead go P&I but reset the clock to a full 30 years.

 

Yup 100% agree but he somehow decided to go for a fixed rate at 4.19% for 2 years stead when I/O expired..........