How will you deal with the rollover of your IO loans into Principal and Interest payments?

Banks aren’t normal businesses and shouldn’t be compared to nor treated as such

 

Its not a borrowing crunch. people can borrow money. They just cant borow as much and on the same terms. The ceiling is lower and the holding costs are higher. And that's where I would argue that for those who arent speculating, that ceiling is temporary and the holding costs are manageable. They can get past the ceiling with dividend reinvestment/ debt reduction, whereas speculative investors cant get past the ceiling without selling or finding large windfalls or pay rises elsewhere

The semantics dont really matter. Give it any name you prefer ( except credit crunch) What matters is that speculators are now operating a very fragile model because the ingredients that helped make it work have been removed. The lack of borrowing capacity is only a small issue, in the grand scheme of things. The holding cost increases when the P& I resets come along is going to be enough to sink many speculators ships or at least do some real damage.

Dividend Reinvestment/debt reduction is the way forward for building and holding and eventually building further and holding further... that's what will keep ships afloat .

Anyway... go forth and pay down debt.

 

I'm not sure the P&I migration is going to cause mass chaos all round, but investors with large portfolios are certainly in the cross hairs. On the upside, there's generally been asset price inflation over the past 5 years or so across markets, so those that played the game and decide to sell up will likely do so at a profit (assuming good allocation of capital into rising markets).

Also the PC average user isn't really reflective of the debt profile of the broader nation (30% of homes are not mortgaged, IO now accounts for <30% of total outstanding debt and coming down).

 

That's seems like a fair assessment.

However, even though chaos may not ensue, the P&I migration is going to have/is having an effect on the housing market.
Any thoughts on how extensive that might end up being?

I am wondering if there will be a longish period of price stagnation across the board. For those of us who are planning to sell, timing is important - if we have the luxury of being able to choose that timing.....

 

If a whole lot of people have to sell at once, and buyers do not have to buy, or they can't...it won't be good.

 

Meaning apply for an extension - my lender will allow it. So maybe reiterate

 

I understand if you had to apply for a brand new IO loan, servicing sucks. However, a few lenders allow for an extension so this should buy people some extra time?

 

It’s just kicking the can down the road - now they’ll roll to P&I after 10 years instead of 5 and their repayments will jump 65% instead of 50%

 

What about going the other way. If you are long term P&I with substantial equity, are banks open to offering (for existing customers) 5 year IO (and at same rate as existing P&I). This use to be all the go, but don’t see it being offered at all. And I suspect it is subject to a full servicability check (no thanks).

 

Am in the awful titanic boat of Perth
Purchased ppor 2007
ip 1 2010
Ip 2 2011
Ip 3 2014
Ip 4 2015

Ip 1 & 2 went up so got deposits for 2&3
Now all have dropped significantly below purchase price. All except poor on IO

Broker said amp would extend IO period for another 5 years no questions asked. Called yesterday to say they did a desktop valuation and they came in too low so will not extend IO. Looks like our serviceability was fine...
Will add an extra 600-800 a month to payments.

what scares me is IP 3 bought in our mini boom. Broker said Bankwest will extend out to 10 years IO without a doubt. Unfortunately he said that about AMP. This one could break us. If we sell, we owe the bank way too much, as this one has dropped the most.

I just dont know how we are going to weather the storm. Im sure we will but its just not looking good. Prices are at record lows here as are rents..IP 1 was getting 360 pw...this is now at 240. These are all city/suburb investments no mining town purchases.

 

We only have two IPS but have already converted ours about a year ago to I&P repayments due to more favourable rates offered.

I voted that we can manage easily, because the leverage is quite low on these.

 

One of my relative use the combination of :
a. Selling one low yield IP that increase quite significant in value - done
b. Refinance 2 x IP for another 5 years - done
c. Refinance 2 x IP shorter length 3 years - done
d. Refinance 1 x IP shorter length 1 year - done
d. Refinance/Reset about 4 x IP to 30 years P&I - partially done
His case is one example creative maximizing serviceability post APRA, not representative of the mass wider investor community

 

I am sure this will be an option for some.

 

the voting options should have another option. not that i cant afford it, but i will be borrowing more and putting it in an offset account. the offset account will be paying my principle.. in essence ill be paying interest and the bank loan will be paying the principal. works out the same as interest only but you get the lower P&I rates

 

Sought tax advice?

I proposed something similar, but have not tried it.
Tax Tip 46: Want to Pay IO on a PI loan? Tax Tip 46: Want to Pay IO on a PI loan?

 

I’m only 3.5 years in, so just getting to the point where i can extract equity.

I just had a look at your post. i was quite surprised that a lot of people don't seem to know about this technique. I think a fair point to make is this is effectively no different than doing IO, except that you can get a much better rate on P&I these days, and banks are much more favourable on P&I. meaning you can have your cake and eat it too...

also, you don't need to have 2 loans as you suggest. you can just extend your current loan and place the money in an offset.

as you pay off your 800k extended loan with a 100K offset = 700k liability
it becomes a 750k loan with a 50K offset = 700k liability
etc...
when your offset is gone you just refinance again.

you just need to keep up the interest portion which is effectively always on the 700k. the mix of P&I and IO you suggested would keep a portion of the loan at a higher rate. it also adds a layer of complexity that you probably don't need.







also you said

 

You have some serious tax issues to consider, especially with the offset account aspect.

This is not the same as borrowing on a IO basis either.

Did you get tax advice?