Divest or Deleverage? What to do with pre-APRA assets when the I/O expires

Some great discussion on the forums since the APRA reforms (e.g. @Eric Wu ("What happens when the Interest Only period expires on your investment property loan?" and @euro73 posts in "Help - how to borrow more?"

I'd like to share a worked example from my own portfolio to get people's thoughts



Presently

• Assets acquired with the pre-APRA mindset of "never sell, maximise LVRs for the NG deduction, let inflation erode debt, hold real estate forever" where CF assets and Equity Releases were "easy"
• 99%+ rental occupancy in the time I've owned them - Walkscores of 96 and 97 respectively, never a shortage of tenants
• Reasonable net cash yields (4.1% to 4.5% which, at current rates, I/O and with non-cash deductions yields a small cash surplus (ca. $5k a year)
• Servcing maxxed out - wouldn't requalify with the Big 4 to refinance these

In 18 - 24 months when the I/O terms expire (and revert to 20 - 25 Year P&I)

• Circa 60% increase in repayments and a +$5000 CF+ position turns into a -$8000 CF neg position - excluding any increases in interest rates
• Requires a further $170~$180k in cash to deleverage these assets into a CF neutral positon

What would you do? "Divest" - sell them now or "Deleverage" - start putting aside capital to pay these down?

 

For me, there is so much missing information that I can not give you an educated response.

Also, I always like to see the option of "Do Nothing" in any voting situation like this. I am not staying I would select that one.

Finally, I would love my property portfolio to be negatively geared to $8,000 pa. Mine is a lot more than that, my loans are all IO and I am retired.

 

Try to extend now for 5-10 years rather than wait?

 

Good question.

But
do you have a non deductible main residence loan?

Will the switch to pi cause you financial hardship?

If no to both then reverting to pi may be a good thing.

And Dave's suggestion is worth considering