Loan Tip: Ticking Time Bomb of Interest Only Loans Expiring

Just check your loan documents to be sure. I have never seen a Westpac loan have an IO term longer than 15 years.

 

Wylie, I would double check that. It's outside all of our experiences which may mean you're very lucky, or you've been misinformed by your broker.

If you've been misinformed, it would be best to find out now.

 

Just pull your mortgage documents out and check... or call the bank and check. As Jess has stated, this is outside the experiences of the brokers here so it's well worth taking the 5 minutes to check your documents.

 

It would be great if everyone could generate much more income from employment - but one of the downsides of this would be massive inflation, and massive rate rises....

The reality is, we are in the lowest wage inflation period in a generation, so this just isnt going to be available to the majority.

Once again - it's why I have been singing the praises of injecting at least 1 or 2 cheap and cheerful NRAS properties into a portfolio. With an NRAS property typically generating between 8-10K tax free dollars into a household, that's like a 12-14K pre tax pay rise. Multiply that effect by holding 2 or even 3 NRAS properties, and that's going to make a serious difference to most household cash flows, and their capacity to aggressively pay down debt. That in turn will provide very valuable buffers against future I/O v P&I issues- if they do happen.

For any investor who has not yet quite reached their servicing ceilings but is within 1 or 2 purchases of doing so, I'd be looking at using that last remaining capacity to get a couple of these cash cows into the mix... think of them as extremely helpful debt reduction tools that provide insurance/ contingency planning against the issues being discussed here.

 

typically @ 40-50K of additional income would be required per million dollars of debt, to restore your pre APRA capacity. But if you can reduce debt , that figure can be reduced.

There are 2 main reasons for arriving at this figure;

1 - Sensitised Assessment Rates.

Setting aside a very very small number of lenders, all debt ( new and existing) is now being assessed at between 7.5% - 8% instead of the actual rate you are paying. In spite of some of the recent claims on here to the contrary, that's happening pretty much everywhere, give or take a few basis points on way or the other...

So while you may be paying 4.5% , if you are being assessed at 7.5%, that's a 3% difference. And at 8% it's 3.5% difference. While there are a small number of exceptions to this - this is overwhelmingly the situation for the majority.

That means that for every $1Million you owe, a bank is saying you are spending between 30-35K per year more than you really are, just to service that debt. And that's on an Interest Only basis. It's worse when P&I is considered. But for the moment, lets just look at I/O

2. Household Expenditure Measures

As we all know, the HEM's have added up to an additional $800-1200 per month to the expenses of those earning above average incomes... This can add up to as much as 10-14K per year in additional expenses being attributed to you by lenders


Add Points 1 + 2 together , and you get 40-50K per $1 Million in debt


The solution to this problem lies in either big increases to income , which very few can conjure up or manufacture, or through debt reduction, which can be achieved by

Big lottery wins - the odds of which are.... ????
Big inheritences - which none of us wish for... OR
Big yield increases such as regional dual occ or NRAS - which can be accessed by all

 

Easy for us. If it happens, we will give ourselves a 25% pay rise by increasing our 4% self-funded pension to 5%. It will be mandatory for us to do this in 4 to 5 years time anyway when we hit 65, unless the Government changes the rules (again).

The joy of being a self-funded retiree.

 

Awesome thanks, this is what I needed to know.
Will be interesting to see how much more it will change over the next couple of years, and how it will affect serviceability again.
So for now, I need pay rises, lucky I have 2 more coming over the next 2 years.

 

Because of all the recent/ new changes to be implemented in the future, I think my next purchase or 2 is going to it for while. It was a great run and learned heaps of things, but guess it was a matter of time.

 

Hi Imbi3, As far as I know a bank can demand full payment of any loan, not just a LOC. I don't think there's would be a greater risk with a LOC product as opposed to a normal loan.

 

Not unless there is a breach of your agreement.

 

We're talking Mt Druitt .... ?

Cliff

 

I see this a lot with people as it is. People have done their TTR and not reviewed the lending thinking the bank will just roll it once the I/O period will finish.

Then theres the broker/lender compliance requirements to build in....

 

For you or any investor in this position, where you are approaching servicing ceilings and may find yourself sidelined from further investment for many years after your next purchase or two, some very serious consideration should be given to deploying that remaining capacity to assets that will dramatically improve your cashflow so that you can reduce debt. Unless you have very large salary increases on the horizon, debt reduction will be the most effective thing you can do to improve your capacity to borrow, over the long term.

Otherwise, the time you are required to sit on the sidelines may be far longer than you think... consider how long it will take for payrises and rental increases to replace 40-50K in reduced income for servicing for each $1 Million in debt you carry ....

 

Thank you and yes, that's my plan to reduce my overall debt levels and cashflow. I just hope that I am not in the sidelines as a spectator for a long time as I doubt I have a massive pay rise coming anytime soon.

 

Rolf, does this mean if you had purchased a home using a loc, they can demand you repay the full amount at any time in their clause?
Example, if I had investment property worth 300k I purchased using a line of credit, they can ask me to repay the full amount if they say so?

That means I would have to either come up with 300k to pay it, or sell up and repay it. Do they even give you time to sell the property if it ever happens?

 

How are you planning to reduce your debt?