How affected are you by the bank's need for principal payments

Keen to know if the Australian banks are just picking on me and insisting on P and I
Not concerned about the I (Interest)
But the P (Principal) is getting pretty high and almost changing me from cf+ve to cf-ve

 

From what I'm hearing and seeing, you are not being targeted it is widespread. As an old colleague was fond of telling me "Perhaps you're not that special!"

 

I am still on IO regardless of the rate penalty. I invest the principal equivalent into higher yielding investments which more than make up the rate difference.

 

Higher yielding investments?? Do share please...

 

Other Asset Classes

 

The pricing differential has come down in recent months - so the 'incentives' to move to P&I are falling as lenders get closer to achieving the regulatory benchmarks.

But yes, a principle repayment on a large stock of debt does add significantly to the repayment (25-40%+).

 

Just build granny flats at the back of your industrial sheds @Beano pal.

 

I have always been on P&I. Principle has made a dent of about 300 to 400 dollars extra/month per property.

 

We have recently taken out two resi IO (different lenders), max 80% LVR. They were very picky on LVR on one, bought at notional 80% but some minor transaction costs put us $2k over, which we had to top up to get IO agreed by credit dept.

 

Commercial property (listed or unlisted), shares like AU paying fully franked divs (be careful of valuations though!), some fixed interest securities (e.g. bank loans, emerging markets debt, high yield bonds).

 

I wonder who voted 30-50k a month? Principle payments are maybe 2-3% of the loan a year. If the principle is 360k a year, you have 18 million dollars of debt.

 

Is selling down an option?

 

Is this an option?

Extract equity from property/ies that you have with one bank, use it to pay the principle part only of the P&I loan in another bank.
Get tax advice first and may need PBR, but can't see how it would not be worth it on such a massive portfolio if you can get it working.

 

Options:
1: repay debt from term deposits
2: new valuations
3: pay requested principal
4: negotiate lower payments
5: supplement principal payments from offshore property division
6: sell down
Lots of options
Opted for new valuation on 2 existing properties obtained a $.5m pa reduction in Principal now only pay $.7m of principal

 

Back in July I calculated the required investment yield to justify paying 4.74% IO (CBA) vs 4.3% P&I, assuming 10 years IO and 37% marginal tax bracket... I needed 5.49% after fees, taxes and interest (debt recycling). I only had about 5% net return at the time with a portfolio I thought was going really well, so I switched my investment loans to P&I.

Now my net return has risen to 6.6%; so ~$3k principal repayments every month going straight to RE equity rather than further fuelling the liquid portfolio. Not the end of the world, but a good problem to have nonetheless (assuming I can release the equity in the current environment!)

 

Would be interesting to see what it would be if you re-financed after 10 years to a new 30yr loan on P&I (for both IO and P&I in first 10 years).

 

The cutoff net return required drops from 5.49% to 3.74%.

 

The principle portion increases as you approach the end of the loan term.
So initially in a new 30 year term it might be 3%, but reverting to p&i at year 25 or 20 makes the proportion a lot higher.

 

Proportion maybe, but if interest rates stayed the same, you will pay the same amount for 25 years.

 

Google an amortisation calculator. The principle portion increases, regardless of the interest rate.