One in five interest-only borrowers could default on mortgage repayments: UBS

Oh. Blue eyes. That's okay then...

 

and yet,
at the end of Jan 19,
we still have close to 300bn IO loans yet to expire by 2019/20/21 (out of total 480bn) that's more than 800,000 loans

Unless one can afford the PI repayment (or there is blind extension of IO loans without fresh app)
I would think IO loan extension/refinance is now even more difficult then it was 12 months ago, as its no longer just about serviceability assessment based on real income (tighter lending) but also about the LVR impact of falling valuation (at least to some extent in regions where falls are now more than 15%)




Property borrowers brace for $300b interest-only credit crunch

 

This is sensationalist without context (and not very timely either).

Over the next 18 months a much much smaller % of loans will revert to IO than over the past 18 months. I.e. the transition has already happened. The impact of the transition on borrowers is ongoing though, so there may be some uptick in arrears/defaults over time as its been a fast adjustment thats been relatively recent, data isnt really showing its material yet though.

Every year into the future there'll be a similar amount converting assuming the stock of IO debt remains similar. Every year IO loans will convert. Every day they'll convert. Some will convert, some will extend, some will repay.

Over the course of the entire market though, the overall stock of IO debt should be broadly similar to what it is now (unless there's an increase in demand for these loans coming). Also, we're already seeing lenders make it easier to extend IO periods again (CBA) as well as pricing spreads slowly tighten.

 

IO extension without fresh app?

 

Is it not close to 300bn IO expiry due in/by 2019/20/21 and is far far less then this figure?

 

The 1-in-5 line is completely sensationalist.

But I think a number of factors in the majority of the first group of loans transitioning from IO -> P&I is without a major issue, is:
* The rate when they took out the IO Loan in 2014-2015 was higher, so a higher buffer was already built in compared to later loans. This means they are more likely than later borrowers to be able to deal with the higher assessment rate. More likely to be able to refianance, than later tranches.
* The higher rates would have meant lower borrowing power and hence smaller mortgages.
* Given the substantial growth post that time, it's unlikely that many of them were in a negative equity situation. Which makes it a much cleaner and quicker sale process. Anyone that forecast having cashflow issues could still get out at a profit and have money in the bank.

There is no doubt the later loans are likely to be much worse quality.
* More likely to be in a worse LVR/Negative Equity position from having bought at the top of the market.
* Less likely to be able to meet the new assessment rates.
* More likely to have larger loans to service.

 

No doubt true, but what would be the affect on demand/the economy/economic stability if this happened on a large scale.
That would juice up the wealth effect.

People would tighten their belts far more agressively. That has it' own unintended consequences.