Loan Tip: Ticking Time Bomb of Interest Only Loans Expiring

Discussion in 'Loans & Mortgage Brokers' started by Terry_w, 18th Apr, 2016.

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  1. albanga

    albanga Well-Known Member

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    Most brokers believe some things are here to stay and should.

    Not that I am qualified to be taken seriously but I am of a very strong belief that as APRA become satisfied it will only be a matter of time before slight tinkering begins to occur again to increase servicing. It is safe to say we will never again see the days of freedom enjoyed pre APRA but I also do not believe we will see the days of today forever either.

    The worse may be yet to come though. It will be interesting to see how that looks and once the dust settles I am looking forward to seeing what things slowly creep back in.

    By all accounts living expenses and assessments rates are here to stay!
    Hopefully we see a relaxation on things like rent and overtime, even a bump to assessment at 90% would make a huge difference.
     
  2. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    I agree with a lot of the changes that have been made because for the masses they make a lot of sense. Certainly there's people who live on considerably less than the HEM models, but the overwhelming majority live on more.

    In many regards however, lenders have overcompensated and I've been saying for months now that there are signs lenders are easing off. This will make life a little better but there aren't going to be any massive shifts in servicing assessment. APRA has always been there, it's just that things got to the point where the felt direct intervention was necessary. They're not going to let things go back to how it once was no matter how much time goes buy.

    Only a couple of lenders I can think of has adjusted their rent treatment. ANZ now takes 75% of rental income instead of 80%. AMP went from using 100% of rent to 80%. My modelling suggests they should only be using about 70%. Don't expect anything to get better here.

    Many lenders have adjusted their treatment of commission and overtime to use only 80% instead of 100%. Also reasonable. It's variable income with no guarantee of it being there in the future. When times get economically tough, these are the first things to disappear.

    What we will see is the lenders who have restricted investment lending to 80% will return to 90% on the basis of supply and demand. Some lenders will adjust their assessment rates downwards (it's already happened quite a bit). Obviously many lenders are negotiating on rates again which was the first casualty of all this.
     
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  3. Seal

    Seal Well-Known Member

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    @Peter_Tersteeg forgive my ignorance, but could you please explain a little more of HEM models? I googled it but didn't get anything brief and simple.

     
  4. albanga

    albanga Well-Known Member

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    Great response @Peter_Tersteeg

    Your response to rent and overtime is very interesting.
    Can I ask how you came to 70%? I do believe this may be the case for some properties whilst others would be less.
    What I mean by this is a brand new house and land home is going to cost far less to hold than say an old apartment (increased maintenance and body corporate). There is also depreciation benefits, but I am unsure how these are taken into consideration on lender calcs? Also arguably less vacancy as a family will usually rent for a long term as opposed to an apartment which has much higher turn over.
    I understand this is all hard to put into a lenders calculator but I do believe some considerations need to be made.

    I also believe the OT one is interesting. Some people generally do make a considerable amount of there wage via OT and has been the case for many years. I think if you could show consistency, even over 2-3 years then they should factor in at 100%.
     
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  5. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    My own modelling is admittedly limited. I looked at my own properties and their associated costs and incomes. 30% seemed about right. I've had discussions with buyers agents who tended to agree.

    Depreciation wasn't considered in my own estimates so for some properties this would adjust the data significantly. Lenders have never included depreciation in their calculators. The outcome of depreciation (and other tax benefits) is also highly dependant on the income of the owner and the ownership structure. The type of property also makes a significant difference. It seems to me that a brand new apartment will have more depreciation than anything else, but also higher body corporate fees.

    You've raised a great point but overall it would be very difficult and cumbersome to model depreciation into a servicing calculator or a statistical rule, so it tends to get left out entirely. If negative gearing becomes restricted in the future, this will be the very first casualty.


    Assessing overtime and commissions over 3-4 years is a fair point, but kind of difficult to prove; most people don't keep that level of detail in their documentation (it's not in your tax returns or PAYG summaries). It could also be argued that this income is usually highly dependant on economic cycles which tend to adjust every 3-4 years as well. An extreme argument might suggest that if you've had 3-4 good years, perhaps they should assume less << winter is coming >>.


    @Seal the HEM model is a set of data which is used to determine how much people spend on the cost of living. Most lenders used to employ the Henderson index for this, which is the modelled cost of living at the poverty line. Both take into account the family structure (single, couple, number of kids).

    The HEM model also includes where the borrower lives (state, metro or country) and the income of the borrower. The argument for the later being that the more people earn, the more they tend to spend.


    It's worth keeping in mind that a lot of the metrics used for servicing analysis is based on statistical models. They're constantly being revised and updated to suit market cycles, economic and political sentiment. There's also a cold logic to most of it and as much as we don't like that it's hamstringing investment strategies, it's difficult to argue against.

    Lenders could dive very deep in to peoples living expenses and other elements to get a more accurate picture. In some cases they'd be able to lend more, in others they'd lend less. In both cases the cost of assessment would also increase which would result in higher rates and fees. It seems most people don't really want that to happen either.
     
    Last edited: 19th Apr, 2016
  6. albanga

    albanga Well-Known Member

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    haha the fact you got a GOT quote into a post regarding servicing, massive tip of the hat :)

    I totally agree with your points though, it was more an observation as opposed to something that could be easily put in place. The number of variables a calculator would need to assess the holding costs of every property type would make it somewhat of a nightmare. Also very valid points regarding depreciation.

    Also very good points about OT, i imagine it would sometimes be challenging to get the last few payslips let alone the last of every financial year and then there is how good there payroll system even notes the breakdown.

    All that said though, if times are a changing and here for good then lenders may need to go down to this level of detail. At the end of the day they want to lend money! If spending considerable time updating calculators, training.etc could result within the laws of APRA an increase of someones borrowing capacity by 50k then perhaps to them it would be money well invested.
     
  7. Marty McDonald

    Marty McDonald Mortgage broker Business Member

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    Yes all true Peter but what I have been thinking / saying is most of these changes are just tinkering at the edges making it harder for no good reason IMO. The difference between $10K pa of overtime or $8K is not what is important!!

    What causes systemic default is >>>>unemployment<<<< how does a lender assess to mitigate against this risk? By seriously scrutinising employment history. Are any of them doing this seriously? No.
     
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  8. Phar Lap

    Phar Lap Well-Known Member

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    Thanks guys.

    I like the idea that banks should be doing more work regarding assessment based upon a borrowers credibility, not just numbers alone.
    How about good record keeping for starters.
    Good records that show if a borrower does have a long history of OT etc.
    I know for one we have every payslip kept on file for both of us back to 2010.

    Credit score. A good history of repayments and borrowing against good assets not consumer related.
    Surely this would not be too hard to "factor" in an application for a loan.

    Savings history. Speaks for itself. Incl offsets.
    Can a bank not "see" if a investor has the smarts to be building a portfolio using IO loans and tools like offsets to ward themselves against any downturn.

    I guess it's too much to ask as these things do look alot like speaking personally with the ole bank manager days, wink wink, she'll be right.

    It just concernes me the APRA thing may cause more harm than good to those who are travelling ok and have their finances in hand. But when the rules change and you're coming off IO you could be forced into something you may be able to avoid if not for a new rule technicality.
     
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  9. TMNT

    TMNT Well-Known Member

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    great post terry,

    is it a matter of time? or a likely possibiliy? or a unlikely possibility?
     
  10. TMNT

    TMNT Well-Known Member

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    great post terry,

    is it a matter of time? or a likely possibiliy? or a unlikely possibility?
     
  11. Phar Lap

    Phar Lap Well-Known Member

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    The other thing too is uncertainty has now entered the building.
    Trying to plan ones loans, accumulation & exit plans with rules changing all the time makes it a bit tough.
    Funny how the regulator wants certainty in lending but wont afford it to the consumer with increasing volatility on policy.

    Rant over. :)
     
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  12. tobe

    tobe Well-Known Member

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    Banks do look at these other factors, but if the numbers dont stack up on their calculator, none of these factors can change the decision.

    That bank manager winking at you was his signal that he was killing off one of your kids for serviceability, and reducing your credit card limit on the application. It wasn't that he was able to override any credit policy for you specially.
     
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  13. Phar Lap

    Phar Lap Well-Known Member

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    OMG, you were my bank manager!
     
  14. tobe

    tobe Well-Known Member

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    ah, no, I was a chef. But I have worked with a few ex bank managers, and lost a couple of deals to your bank manager in the past.
     
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  15. Phar Lap

    Phar Lap Well-Known Member

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    Are you sure…..?
    You look like him. LOL.

    Thankfully we have these wonderful brokers today who sort out the deals.
     
  16. D&J

    D&J Well-Known Member

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    Hi there Euro

    How can I get more info on NRAS lending? I have zero knowledge/understanding of what this is.

    Is it a type of loan or type of property etc..
     
  17. kierank

    kierank Well-Known Member

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    We sold our business in 2010 and were able to increase our super balance using small business concessions, employment termination payments, etc. We had retired but, for the first 3 years, we lived on our own personal funds.

    After a number of meetings with our financial planner and our accountant, we switched our smsf to pension phase and commenced paying ourselves the 4% pension. So we were both aged 57 and this FY will be the 3rd year that we have been paying ourselves a pension.

    We were concerned about this as well. To reduce the chance of this happening to us, our financial planner and our accountant recommended that we keep around 3 years of pension payments in cash or capital stable investment. I have just checked our smsf and we have about 15% in cash.

    The other 85% of our smsf is in growth investments, either in direct shares or managed funds. From memory, we plan to achieve around 7% to 8% capital growth and 3% to 4% income. So, the smsf balance should grow over time and the income tops up our cash that we are using to pay our pension.

    I perform a net worth calculation at the end of every quarter (been doing this since January 2003). Since we have moved our smsf to pension phase, our smsf balance at the end of last month was 19% higher than what it was when we commenced the pension. Yeah, the share market has been up and down over that time, but we are happy with that result.
     
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  18. Plucka

    Plucka Well-Known Member

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    IO loans on OO don't make any sense anyway, way too risky and says to me you are borrowing more than you can really afford. Not surprised if banks are clamping down/removing these type of loans.
     
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  19. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    That's the common argument you'll get from APRA and the risk departments of the lenders.

    It's not a very good solution for those purchasing a property to live in in the short term, but will eventually become an investment property when they upgrade. About 70% of the singles I meet fall into this category.
     
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  20. Phar Lap

    Phar Lap Well-Known Member

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    But the banks assess you on P&I anyway.
    How can this be borrowing more than you can afford any more than IP loan ?
     
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