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

Depends what the difference is. You can get very close to 4% fixed for 3 yrs with the majors. That's not bad.

 

This is the next crisis....and lets face it it is going t take the sails out of the markets in Sydney and Melbourne. Brisbane, Adelaide, Perth and most regionals are much less affected.

I too have this quandry in about 7 months on one loan. I am negotiating with Suncorp to being the loan down from 4.39% IO to 3.69-3.79% PI. The impact is about $300 per month. The other 25 plus loans have at least 8-10 years of IO to go.

A lot of people did not plan...for this...and they are going to feel the pain. I also plan to sell about 5-8 properties over the next 4 years. So this is going to impact me even less..,but will now focus on flipping properties.

A lot of people cannot service now...so refinancing is not an option. If they have to sell ...their timing could be poor and their hard earned profits could reduce significantly.

Absolutely....based on what I see on the forum a lot of people don;'t have huge buffers or cashflow....if they have the unfortunate circumstances of having say 6-8 properties go to PI and then it is going to get interesting.

Yeah...but if you suddenly have everything turn to PI and can't hold that is even worse. I see a lot of people hang...this happened last cycle and it did not turn out too well.

 

Hi @Rolf Latham

Do you have a source for this - doesn't sound right. Surely has to to be higher than 2%?

Cheers
Greg

 

I have been telling forum readers for years to get some extra cash flow into their portfolio's, whether it is for debt reduction or to hedge against P&I .

I have been telling forum readers for years that this is the decade to deleverage.

I have been telling forum readers for years that the P&I cliff was coming

I have been telling forum readers for years that they had time to re-calibrate their portfolio's.

It's still absolutely realistic to sell one or two or three resi properties that have made you some money already but are producing low yields that wont adequately cover P&I - and then replace them with one or two cash cows in areas that are now growing.

This will enable you to maintain a nice portfolio but with a different cash flow mix, a cash flow mix that is adequate for P&I migration. I've been able to migrate more than half of the $$$ value of my loans over to P&I in the last 12 months, several of them only 2 or 3 years into their 30 year terms , and certainly well before their first 5 years of IO has expired, because the cash flow from the portfolio makes it easily manageable. Sure, it takes the shine off my annual surpluses, reducing them from 8,9,10K CF+ back to 1 or 2 or 3K CF+ , but that's OK... it is still costing me nothing to hold, making me a modest annual surplus and now I'm slowly paying down the properties organically under P&I and with a little help from modest extra repayments ..... Most importantly, this large asset base I built is protected . Im in charge of what happens to my future and my family's future...not the banks or market sentiment. I am under no pressure to sell anything, and if the very worst were to happen... a 15-20 year period of little or no growth... I'm still coming out the other side wealthy. I can carry on under these arrangements for the next 20 years or so and all my debt will have been paid off, leaving me with several hundred K of passive income even if we see years and years of no growth...

It is the only way you can hold a large portfolio and still profit handsomely from a no growth or low growth environment ... if that's what plays out. And it would be foolish to rule that out when we have such severely reduced debt to income ratios.

This is especially a no brainer when you also consider how few growth/speculative investors made it past 2 or 3 properties or anywhere near 100K passive income even when big growth and massively expanded debt to income ratio's happened for the 25-30 years pre APRA. An absolute no brainer.

Sell some profitable, low yield properties and replace them with a couple of cash cows.... protect your portfolio now and your retirement income of the future. Stop speculating. Start dividend reinvesting.

 

That is very true..but the figure is something like...5% have more than 50kpa..just a better than the pension for a couple of about 34k.

 

Retirement incomes: how does Australia stack up?

Australian retirement incomes: do we have a problem? – Melbourne | Grattan Institute

This is how much money Australians have in super | The New Daily

 

Yep sell your negatively geared assets and replace with cash cows before Bill Shorten and his commi mates get in and make them even harder to sell.

 

Existing properties and existing tax arrangements will be grandfathered... but yes, if NG is removed for anything but new dwellings as is being proposed ( ALP has to get in, and the legislation still has to get through the senate) it will make the sale of established INV properties to other investors a different mathematical proposition - for the buyer's cash flow and holding costs, and for the seller's pockets.

I called it several years ago - high yielding properties will become more sought after in the coming years. I was of the view the lending maths of building and holding a portfolio would drive it... but you are correct that the tax maths of holding a portfolio may also drive that outcome. Combine the two drivers... well I'll let readers do the maths on that

 

Ah flock it, says some:

Interest-only borrowers flock to principal and interest home loan discounts

 

"Probably in the last six to eight months it's become significantly more prevalent that clients will request to switch prior to their periods [ending]," she added.

I have one IO loan left that I will switch early for a lower rate.

It has been posted on this site that all IO loans from 2014/15 will be forced to IO in 2019/2020, with mass defaults and forced sales, crashing the property market. I would suggest that is not such a likely scenario given the above.

 

That is a pretty silly article.

All mine are interest only...and I am actively managing this transition. The good news is most of mine expire after 2027..so I have plenty of time. I have started to sell down slowly ...so that I have cash in the bank fully offsetting loans coming off I/O.

I just negotiated 3.89% with Suncorp on two 3 year fixed loans. During this period one loans will be I/O for 31 out of 36 months...and then it goes P&I and the other has 11 months out of 36 months before it goes P&I. I was happy to fix for 3 years as these are in WA and I can't seeing the WA market moving significantly under 3 years. The interest rate will jump...by 60%...but I am okay with this one one...the other about 40% due to the terms of the loans. But the good news is that I am saving quite a bit on short term which will go automatically into a offset.

With a plan to sell another 6-8 properties over the next 4 years...I should be okay as I will also deleverage partially (some I will repurpose loans to growth markets). i should be able to reduce debt by about $2.1m to $2.8m depending on how much I re-purpose. That should leave me in the hock for about $1m-2.5m as I also will borrow another 650k to complete a couple of developments in Geelong. I can live with that.

A lot of people on this forum blindly bought multiple properties with incomes under 100k.....and most of these were on 5 years I/O. At the end of the 5 year term most will not be able to refinance..and will probably struggle...some WILL go to the wall.

Let look at a example for Jane.

Jane has an income of 80k and during the Sydney boom bought 5 properties for $350k each and with total loans of $1.5m at an average IO rate of 5% with repayments of 75k per annum. The value of her portfolio is now worth $2.7m. She has about 50k in offsets. Here total rents are 95k. The total expenses on her 5 properties is 5k each or 25k per annum.

Currently her income from properties is 90k....and her expenses is 100k..so here net loss is 10k excluding depreciation.

As her loans come off and assuming she goes P&I rate of say 4.5%. Assuming most of the loans were taken over a 30 year period with 5 years of this IO. She will be up for 110k in interest repayments. That would take her shortfall to 125k. That is a 35k short fall.

On a 80k income she will be in serious trouble. Her offsets could offer some relief...but not for very long....maybe 2 years or so......

Something to think about......

 

That's an impressive rate.
I am going to have to polish up my negotiating skills.

Fortunately she's has $1.2m in equity so with the sale of even one property she'll be able to balance the books somewhat.

Even without a sale, if she watches her spending, she should be able to still manage on the approx $31k take home pay she'll receive. (She'll receive more if she has depreciation deductions)
In fact.... some of us might even see that as luxury living!
If interest rates go up though, then selling is the likely scenario.
An increase of 1% would mean extra payments of $15k per year.

Encouragingly, approx 85% of those who have voted so far indicate they will be able to manage the change to P&I.

We may not be on the edge of the precipice after all.

 

Some ..maybe many...but maybe just some.... will be confusing their ambition with their ability

Its impossible that a 50% increase in repayments wont catch at least some people out.

 

I thought it was slightly higher than that.
Cant remember the exact numbers , when you look at the "average" amount in super the numbers look reasonable , but the big change occurs when you look at the median amount , which just shows the woeful amount that people have in super.
Having a small percentage of the population with a massive amount in super , just masks over the figures.

 

Lets see......most people have a very poor understanding of cash flow...over 90% have no understanding...I not only talking poor educated types but educated professionals.

As for selling.....not as easy in a downmarket and it could take months...and you would have destroyed some of the equity. So it pays to plan early.

This is what separates investors from amateurs......

The other thing which could be if there is down turn in jobs at the same time...happened in 1990. I am already working to a plan...still acquiring but also selling.

The slow transition to less maintenance assets is happening either via replacing some places new builds or full renovations on some of my older stuff.