IO2PI rollover updates

IO borrowers warned of repayment spike - Mortgage Business

 

If anything I think in reinforces why it’s not really an issue.

Small loan sizes, higher rates, no data on what property types, no allowance for rental increases, nothing regarding building offsets in the IO time.

Nothing to see here.

 

Just another fear mongering article imo.

 

As I said it further solidifies the non issue.
The article itself says the average Loan size 5 years ago was $395,000.

So even for those that can’t refinance (I would argue 95%+ could) then factoring in the lower rate on P&I plus rental increases then you might be out $100 a week.
Of those -5% that can’t refinance how many have saved cash buffers.

For those that can refinance let’s include 30 years loan term with lower rates and rental increases. The change in cash flow would be negligible.

 

I think a lot of these articles focus on people who bought in mining towns etc.. and so they assume the worst possible outcome (no rent increases, negative equity, unable to refinance, no savings).
I am sure that there is some people who would fit that criteria but surely that would only be a small percentage.

 

It's played out pretty much exactly as I said it would... rate cuts to provide a cushion effect to provide for an orderly mass migration to P&I for all but the most leveraged borrowers, who may still potentially have P&I cliff issues ... I also said there were high volumes of IO written in 2015 and 16 that hadn't migrated yet, and that people shouldnt be saying the P&I issue had completely passed.... and the article is simply pointing out that there are. 730,000 IO loans maturing this year is worth noting. 39% of loans written in 2015 is worth noting... banks arent going to be letting all 39% of them have IO again. Also worth noting.... so there will definitely be some forced migration to P&I. But rates have become low enough that the pain should be minimal for all but the highly leveraged.

More broadly, people starting to pay down some debt is a good thing for everyone.... it will put a safety mechanism into the system that should prevent any large scale mortgage delinquencies and prices falling off a cliff down the road .... the only thing that represents a real risk now is a recession causing that outcome... but if people are taking advantage of these low rates to make extra repayments and get way ahead on repayments , there should be some strong buffers against that as well...

Still the decade to deleverage for those who don't already have mature portfolios delivering mature outcomes ... especially with rates at current settings and servicing calcs rewarding P&I

 

And then there is coronavirus

 

I would love prices to drop 20- 30% because of the virus. I am ready to buy up. It would be the easiest buying decision to date

Before you know it, this virus will be ancient history and house prices will still be making history

 

Personally I find it hard to believe anyone who says they saw this coming. As far as I’m concerned APRA wildly overshot the mark and cut people’s capacity at the knees.
We then rolled into an election with 1 party promising to annihilate property tax concessions.
Throw in slow economic growth and wage growth and they had to quickly try and act to turn it around and return confidence so people were actually not afraid to spend a cent.

Surely your not suggesting rate cuts were done to ease people on a P&I cliff?

I have no doubt in my mind rates would be higher if APRA didn’t make a dogs breakfast from the start.

 

You only need to review posts I wrote back then to ease that concern. I started by saying very early on that I called a 30% chance of rates cuts, then increased it quickly to 50% as the picture started to become clearer, then to quite likely as we started to really understand how the IO quotas and P&I resets were starting to bite. It seemed very apparent to me very early on that rate cuts or a reversal of the regulatory changes would be necessary to prevent serious issues with mortgage delinquencies... and to aid the migration to P&I which was absolutely necessary. It was the only way they were going to get the P&I migration done without blowing everything up....

APRA had to act... their mistake wasnt overshooting per se. It was to act too late. I guess you could argue they wouldnt have needed to go so hard if theyd gone earlier- so perhaps it meets the definition of overshooting in that regard. But it doesnt from the perspective of whether their actions were required. They were. Australia relies on wholesale debt to run itself every day. Lose that access and the place collapses... APRA did exactly what they had to do when they discovered how much IO debt was in the system. But where they absolutely failed was in 2012. They should have introduced servicing buffers at the very least , when they commenced a series of large rate cuts in May 2012. They reduced the cash rate by 150 bpts in 12 months, from 4.25% to 2.75%, and blind freddy knows what happens when you do that and leave "actuals" in play . To this day I am astounded they have escaped any repercussions for that - talk about being asleep at the wheel. They really should have accounted for that back in 2012. Had they introduced servicing buffers then - even modest ones of 1% combined with P&I remaining term for example, and had they monitored IO volumes more closely then and placed a cap on them - even at 30% for example , they would never have needed to act so aggressively later.

I am . Perhaps not the only reason, but it was a big driver I would say. The RBA knew/knows rate cuts don't drive wage growth when they are already this low.... this was done in concert with an APRA mini walk back in order to reduce the chances of the whole house of cards coming down, while still getting an orderly migration to P&I executed, an in the hope it would get consumers spending a little more. If they hadnt reduced rates and eased assessment rates, I put it to you that lots of people would have faced a serious P&I reset or cliff... Lots of people would have struggled with it if rates were higher and assessment rates were higher. And I suspect a good number of OTP sales that settled, may not have settled under those regimes either. And discretionary spending would certainly have fallen off a cliff, spilling the risk into other segments of the economy even worse than has already happened. You'd have had a situation of limited borrowing capacity coupled with at least some extra stock coming to market that was falling at the time....... and probably a retail recession at the very least ( if we arent already in one) . What do you think the result of that would have been, and the result to Australias agency ratings and banks costs of funds if delinquencies had accelerated?

I would only change this to... if they had acted earlier