IO2PI rollover updates

I remember a whole bunch of them who have come and gone. There was even one preaching very loudly and agressively that the global economy would be in a global depression by now. I know a lot got banned because they refused to comply with forum rules. Others just sort of petered out because they couldn't get any traction.

I have noticed a core group of actual investors, who copped a lot of flack from the doom and gloom parade, are still around and still posting about investing.

In the last couple of years I have invested significantly through super and even more into property. From my point of view it seems to be paying off and I am very happy with the performance of my investments.

I sometimes wonder what happened to the doom and gloom brigade and if they are happy with their investment decisions of decision not to invest. Although, sonce most of them refused to disclose how they were investing or not investing their money, it was a bit hard to tell.

 

That 40% was a made up number and assumed that interest rates would not drop. Interest rates are way lower, so the impact is less than 40% for some people. The other side is income. I built on the back of one property, now bringing in an extra $2,000 per month. Another house, that was bringing in $1820 per month, is now an airbnb bringing in $5k this month. So my debt is less but my income is (at least) $5k per month higher than before I converted all my loans to P&I. That blows the 40% right out of the water.

 

The figure is much closer to 55% than 40% , but only where your P&I rate stays the same as your IO rate ..... as you have suggested, the pain is less if the rate is reduced. As I said many times a couple of years back, rate cuts would likely need to occur because a cushion effect would be required to reduce the 55% increase to repayments to a much less shocking figure in order to assist with the orderly IO to P&I migration and to avoid massive mortgage delinquencies and a mass sell off by investors ... and that is exactly what has happened in mid 2019. It has all been handled in a very orderly fashion and the P&I cliff has largely been avoided.... for now. But people are going out and gearing up again, prices are accelerating again which means people are borrowing larger amounts again....and they are buying stock with very low yields.... so I would only caution against people thinking the P&I cliff has gone away permanently . It has certainly been deferred, but it is still a "thing" to be very mindful of and debt should be managed accordingly . The increase to repayments when a loan migrates from IO to P&I can still be a big shock if and when it comes - even at these lower rates.

 

Yep...but some like to stick their head in the sand.

I hold a large debt..I am already in the process of halving this in the next 3 years. This is my net debt but even with the reduction I will still be at $4.0m....but the net debt should be at around $2.3m

I don't need to do this..I could sell a lot less but I don't want he headaches of moving things around.

 

Assuming you had to accept the P&I Cliff (I think we have established that very few people fall into this category of it being an actual issue causing fire sales).

Then the 40/55% increase or whatever it is still doesn’t take into consideration interest rate drops, P&I revert rates, Pricing discounts (hopefully on LVR going low) and Increase in rental income.

Factor in all that and what’s the real number?
Not to mention if we consider a change in increased income....or do we still maintain no one has ever got above CPI or everyone is retired??

Then how bad is the actual impact for the minuscule number of people that are truly effected??

 

Hardly seems like a bad problem

 

From a macro perspective, there has actually been a massive repayment increase in the system.

~15-20% of all mortgages converted inside a very short space of time. If you do the multiples, that's huge & ongoing. No surprise when you take this much liquidity out of a credit system in such a short space of time, asset prices decline. Consumers adjust budgets accordingly and plans too.

From here though, I'd be surprised if IO lending doesn't stabilise & if anything, rise a little.

It will go nowhere NEAR the highs of 2016 - they won't let the stock of all mortgage debt creep anywhere near the levels before.

IMO, this was one of the biggest risks to financial system in Australia (particularly given size of mortgage lending in our system). Navigated away though, without too much damage. It was a failure to let it get there in the first place. IMF had harped on about this in FSAPs (delicately) for a while before it was actually addressed by APRA.

Now, 20-25% of all mortgages in Australia is IO today. In 3-5 years time, it will be a similar level. There is no major forced deleverage here if IO stock remains similar over the period.

 

thats good, thinking outside the square to generate more income

the issue of loans reverting to P&I has not gone away and strategies will need to be implemented to manage this if debt can not be serviced.

How or who it impacts will be dependent on a number of factors.....debt, ability to
Service debt, ability to refinance etc

 

Nah...but still needs to be managed.

Most of mine were taken on the old 10 and 15 year interest only periods.

So for I/O period at 3.89% the repayment of 200k loan is $648

Once in P&I at 20 years it is $1,149

Once in P&I at 15 years it is $1,419

You can see what can happen.

On a $3m loan I/O is $9,720 pm
At 20 years P&I is $17,235 (double almost)
At 15 years P&I is $21,285 (about 230%)

 

I don't log in as often as before I guess workplace restrictions played a role,
besides, I got a bit tired of constant personal attacks, and then moderators warning in spite of never initiating mudslinging or being disrespectful.

I still log in some time to read posters I respect from both sides to keep abreast of whats going on.

I was and still a fan of RE Investment at the right valuation.
My analysis for forthy segments was based on the facts of the time, I am not married to a view, when fact changes I change my tune, I believe credit availability is one of the most important pillars of RE growth, by reopening the credit tap RBI has pushed the can further, but rising leveraged based on falling IR rather than increasing wages has a limit. Any fundamentally strong market shouldn't require artificial propping up of fresh lambs to continue the party.

I would be interested to know what do you think of Sydney RE as an investment at current valuation and why.

 

While it always seems that sydney is expensive (even during the gfc, 2018), if sydney population hits 8m in 2050 or so (ABS projections)...... hard to see how most property that exists now will not go up.

A catastrophic crash due to mortgage meltdown? Possible but low probability. Low enough to ignore when buying? Thats up to the individual.

 

As a forever optimist I never have really agreed with a lot of your pessimist posts. However I always thought they were very well researched and delivered.
Some of the other pessimists that have disappeared good riddance too, they were just blatant trolls, but I have missed your other side of the ledger posts.

This is another example of a great post
And to answer your question, long term I’m not a huge fan of Sydney. I think it will do very well the next 2-3 years but I prefer a few other states.

 

+1

 

Another great post.

Just to tease this out, because it is interesting.

Optimistic on Sydney for the next 3-4 years, but not in the long term.

Why is this, and what do you expect to see in the longer term that will make Sydney less attractive than other cities? Time frame?

 

Valuation risk/reward?

Personally I have seen original X investments(overseas) turn to 34X(price:7X) in 8 yrs, and then remain stagnent and fall a bit for 9 yrs.
Rents covered the repayments even in early years of mortgage due to initial lower valuation.

Now 17 yrs later, it may be 32x (20x after currency adjustment) and yearly rent alone is equal to my original X investment,
not complaining but I was lucky being at the right place at the right time(start of credit boom) at the right valuation.
Imagine if one purchased it at peak and left holding a loss making asset YOY for now close to decade.