P&I or IO

Hi All,
Apologies if this has been discussed a million times already.

What's the deal with P&I and IO loans. Lots of property investors are finding that when there IO term expires usually after about 5 years that the banks are asking them to move to P&I. How are people dealing with this as i'm sure there are lots that could not afford to convert all their loans to P&I?

 

Buffer, sell.

 

I would have thought looking to re-finance to another lender that may provide IO as a starting point.

 

Most people can't qualify for what they have under the new calcs so can't move somewhere else. it's either sell or go to P&I.

 

Right I see. I recently tried to borrow from my current lenders and had the same issues with servicing. I found a new broker that could get it through with a new lender so I am about to re-finance. Surely moving from a bank to non bank lender may be a possible solution?

 

*Puts arm around Lawrence Barnes pal.

What if I told you a lot of people on here are tapped out already and practically only use the generous non banks.

 

Love it!
Enough said.
Thanks

 

The people who will have serious problems with it are those with larger portfolios who have borrowed aggressively. Given the growth over the last few years they're also likely to have quite a bit of equity available. For those who can't refinance, selling is possibly a viable option.

Those with smaller portfolios, one or two properties, are more likely to be able to absorb the repayment increase, although they're probably not going to be very happy about it.

 

That makes sense. I was just talking to my broker about the situation as well and he advised the following:

I think this is the big issue to be faced, as it’s only the last 6-12 months banks have not just rolled to another interest only period although Westpac / CBA will still allow another 5 years with no real income verification, but not beyond 10 years. There are a lot of loans to roll off Interest only in the next 1-5 years and yes having a lot of conversations with people around this some are looking to sell some are looking to move banks if they can, some are just paying the new repayments.


I think though this will be a bigger issue in the coming years.

 

I agree @Lawrence Barnes the worst of it is yet to come.

The really nasty stuff isn't those who took a 5 year I/O loan in the last few years, it's the ones who have a 10 or even 15 year I/O period. A 30% increase in repayments is a lot to swallow, a 50%-60% increase is a lot worse.

What concerns me is I've already had people insist that it should be extended because they can't afford the payment increase, but they've given no consideration to what would occur if that extension is granted. Rest easy for a few more years, then instead of dealing with a significant increase, they've got to deal with a massive increase in repayments.

My suggestion to people who are concerned about what will happen to their repayments over the next few years is get onto it now. Switching to P&I now will result in lower repayments than if you wait a few more years and it is coming, like it or not.

 

Are you refinancing with pepper or liberty @Lawrence Barnes?

Did your broker explain about the risks with lenders of last resort? Or have you searched the Finance threads here?

 

Thanks for the advice Peter. Hard to know what to do to be honest. I personally could not switch everything to P&I the payments would be too high.

 

Pepper in my case. I have spoken to others on this forum about possible risks about getting stuck and then not being able to re-finance with another lender, is this what you mean?

 

pepper is already pretty low in the list of lenders. If there is tightening the secondary lenders might raise rates quickly. If you cant afford pandi at big4 rates, you might want a bigger buffer.

 

There are risks in everything we do in life, if you don't take some risks you don't get anywhere. I weighed up my risks of either stay with the same lender that won't lend me anymore so I cannot renovate the property I am living in or move to a lender that will allow me some more funds to renovate but potentially may raise rates or other issues. The risk of doing nothing was far worse in my eyes hence my decision. None of us know what is going to happen in the future and we can only make decisions based on the facts today.

 

I mostly agree with everything you have said, except "None of us know what is going to happen in the future and we can only make decisions based on the facts today" because mostly I believe we do have a clear idea on what is happening in the market atm with many of the lenders and how serviceability is an issue for many investors, which is something which should be considered for the future.

I think we should always go for the worse case scenario to provide us abit of a safety net and put higher stress threshold to cater for this.

 

Yes agreed. I think we have all been caught out as most of us have been taught to use IO lending for investment over the years. We never wanted to pay down investment debt that we are claiming the interest component on, especially when we still have non deductible debt. Changing rules require a change in strategy.

 

We're all going to have to suck it up eventually. I get what you mean though, but forward planning is also prudent. Personally I plan to start paying some down so the banks don't co-own my properties forever and a day. Just have to find the balance between live for the day, and plan for the future.