Join Australia's most dynamic and respected property investment community

IO expired after 15 years: what are your exit strategies?

Discussion in 'Property Finance' started by Luca, 12th Apr, 2016.

  1. Luca

    Luca Well-Known Member

    Joined:
    28th Jan, 2016
    Posts:
    124
    Location:
    Melbourne
    I know this is an easy question, but I am just wondering about different strategies here on PC.
    Let`s say you buy an house, fix IO at 15 years (which is already a good achievement).

    What do you do after that? Convert to P&I I assume.
    The real question is: how do you repay the higher P&I monthly rate (and can be a lot higher in 10 years time)?

    1) Saved enough money in the offset account to cover the new monthly repayment
    2) Get equity from the house to repay the outstanding mortgage
    3) Sell the property, pay of the mortgage and hopefully have some money left

    These is all I can think about (just to clarify, I am not an experienced investor).

    Cheers,
    Luca
     
  2. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,103
    Location:
    Melbourne, Nationwide
    Personally the loans I've had that long have since reverted to principal & interest long before 15 years. It's not the perfect tax outcome, but even on P&I schedules the properties are heavily cash flow positive and it means that I will eventually own them. The rents have increase by a factor of about 2.5 times and paying down debt isn't a bad thing.

    Many people have refinanced the loan long before 15 years and in that process they tend to reset the interest only period.

    In a 15 year period a LOT can happen. I know in your circumstances there may be some unique circumstances, but realistically it's not likely to be a significant problem if you're investing in a reasonable prudent manner.
     
  3. Luca

    Luca Well-Known Member

    Joined:
    28th Jan, 2016
    Posts:
    124
    Location:
    Melbourne
    Thanks Peter,

    2.5 increase in let`s say 10 years is not bad at all.
    I think the problem is when you have 1.2/1.5 which could happen I guess.

    Totally agree on P&I. P&I cash flow positive should be what everyone should aim for.
     
  4. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,989
    Location:
    Sydney
    Keep in mind the repayments will be very high because the loans will revert to PI over just 15 years.

    When you can you should always increase the IO period midway throguh and while at it extend the loan term to 30 years again. This will reduce the impact.

    Hopefully within this period you would have paid off your non deductible debt so paying PI may not be such a bad thing anyway.
     
  5. Scott No Mates

    Scott No Mates Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    5,565
    Location:
    Sydney or NSW or Australia
    Why? The average loan taken out 15 years ago would have been around $200k on a $250k house. That same house would be worth close to $700k (or more) but only a $200k IO loan. Assuming that you haven't taken out equity loans in the meantime (but these would not be under the same 15 year IO loan).
     
  6. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,989
    Location:
    Sydney
    It doesn't matter what the house is worth, suddenly going from IO to a short PI loan will mean a large jump in repayments.

    e.g. $200,000 loan at 5% = $10,000 pa interest only
    After 15 years if this reverted to PI for another 15 years the repayments would be $18,984

    Almost double.

    If you ahve multiple properties all with IO reverting to PI at the same time, this could ruin your retirement.
     
    Perthguy and York like this.
  7. sash

    sash Well-Known Member

    Joined:
    19th Jun, 2015
    Posts:
    3,214
    Location:
    Sydney
    Personally I would not worry too much about it.

    In 15 years..if you bought in the top 10 cities in Australia...even with a growth of 5% it will more than double.

    At the same time your rent will alos double...
     
  8. Luca

    Luca Well-Known Member

    Joined:
    28th Jan, 2016
    Posts:
    124
    Location:
    Melbourne
    @Terry_w spot on. Include the chance to have rates @ 6%-7% when it turns for IO to P&I. We always should ask ourselves how we are going to repay the Principal. The quick answer is that we should accumulate enough money in the offset to repay it. Time-frame depends on your own strategy.

    @sash I am probably wrong but I would say depends where you bought, when and price range. Let`s take Thomastown here in Melbourne as example. Recent sales saw prices around $500k for an average property on a 500/600 m2 lot. I don`t see the same property being valued at $1Mil in 15 years time, same for the rent. If you buy at the bottom phase yes I am with you e.g. Adelaide now / Perth in 1/2 years time?
     
  9. Omnidragon

    Omnidragon Well-Known Member

    Joined:
    17th Oct, 2015
    Posts:
    414
    Location:
    Victoria
    Well as my father always says, he bought his first house in Albert Park for $15k. and his second in East Melb for I think 30 or 40k.

    $1m might not be as unthinkable as you think.
     
    York and skater like this.
  10. Mumbai

    Mumbai Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    763
    Location:
    Sydney
    well, you have so many examples of that happening in Sydney. And it happened in lot less than 15 years, mind you.
     
  11. Perthguy

    Perthguy Well-Known Member

    Joined:
    23rd Jun, 2015
    Posts:
    4,722
    Location:
    Perth
    Lots of options:
    - sell the IP (or sell another IP)
    - apply with the same bank for an extension to the IO period
    - refinance to a new bank and get an IO loan
    - put funds in an offset account to offset the increased payments
    - hope the increased rent covers the increase in payments
    - take out a second loan against the property (assuming equity is there), buy dividend shares and use the dividends to pay the increased repayments :p

    It is good you are thinking about it though. Some people don't plan for it and it takes them by surprise. Not good.
     
  12. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,385
    Location:
    Sydney
    I had a client with 5 year IO and the bank "forgot"" to revert to P&I at that time. After 10 years (late last yr) they insisted same term and repayments went up substantially. He refinanced back to 20 years P&I and was OK but the lender refused new P&I or 30 years. The new regime for lenders is making all these things harder. Banks are seemingly now required to be diligent with refinance deals too.

    One strategy is use a great broker so you know the options.
     
    Perthguy likes this.
  13. Luca

    Luca Well-Known Member

    Joined:
    28th Jan, 2016
    Posts:
    124
    Location:
    Melbourne
    Thanks guys, good comments. I think considering today`s lending environment if we say 10 years IO and 20 years P&I is a good strategy. Other than this, let`s hope that prices and rents double up within 10 years.
     
    Perthguy likes this.
  14. sash

    sash Well-Known Member

    Joined:
    19th Jun, 2015
    Posts:
    3,214
    Location:
    Sydney
    Agree if you bought at the very top...you will be hurting for a while......
     
  15. Luca

    Luca Well-Known Member

    Joined:
    28th Jan, 2016
    Posts:
    124
    Location:
    Melbourne
    Guys, I crunched a bit the numbers and all make a sort of sense. This can look obvious to most of you, but I thought it was a good idea to make a quick list especially for the new to the game e.g. me :)
    • Set you strategy. I assume most of us wants to have a passive income to retire earlier. If so, you will need to pay-off your loan, sooner or later.
    • Plan properly (for what you can). What will happen in 20/30 years?
    • Don`t buy because everyone is buying. Do you DD.
    • There will be one point when the loan will turn from IO to P&I. I see this as the critical point. Repayments will probably double. More properties, more risk.
    • Rates can be not so generous when this will happen.
    • Make sure you have a strategy in place to repay the P&I e.g. need to accumulate enough cash and be prepared when the turning point will happen.
    • With the exclusion of particular windows where prices go down, if your strategy is a on 30 years or more you should be able to sell the property and make a bit (or a lot) of profit, this having included holding cost and repayments. Unfortunately there is a monster out there that doesn`t help, CG tax. Don`t forget about it and make sure you strategically think about it. Buy&Sell or/and Hold. I am more oriented to the second with the first helping along the way.
    • RE is just a form of investment, time consuming with different levels of risk. It is not the only way to build wealth. Shares are a valid alternative. You can work on both to minimise the risk of your investments. If you have family and full time job, you`ll probably need to concentrate on one and leave the second behind.
    I wish everyone to be successful on this journey and thanks to the great people who give free advice on this forum.
     
    House likes this.