Panic Setting in Sydney

Thanks makes sense.
How about Bank West?

Obviously what I am getting at is that I am sure that if CBA wanted to, they could create/buy/split off a new entity with which to increase their ability to provide I/O loans.

Further, if the big four have their hands tied it opens up the ability for overseas banks to come in and fill the gap which is good for everyone except the big four.

If there is one thing the financial industry does best. It is not letting pesky regulators stop them from making money.

 

They have their own licence... they are an ADI in their own right. But they still have a 30% new business I/O quota...

 

They arent suffering...they are just making more margin per deal on less volume.

 

Not sure its that simple. Getting a banking licence is very tough in Australia. International banks dont tend to do well. HSBC, Citi. Gigantic global players who havent made much of a dent here in resi mortgages. Bankwest ( previously owned by Royal Bank of Scotland) and ING are the only exceptions and neither are very useful to investors

But the treasurer is apparently considering allowing Australia Post and some other larger entities into the market. They would be tiny players though...

It doesnt really matter how many new lenders come in. If servicing calcs dont get significantly easier, what difference does it make?

 

One of your points is that investors can't get I/O loans, which is caused by the lenders being limited to how many they can sell.

I/O significantly increases cash flow, and in turn serviceability.

So if there are more lenders, there are more I/O loans, which both enables investors to use them and creates competition so the banks stop jacking up the I/O rates.

 

Right, so it's possible.

 

Exactly... Ye only ppl losing from these regulations are property investors.

Banks are making more money on less risk and less volume... happy days..

So banks are already 'working around' the pesky regulations to maximise their profit. Why would this change?

 

Incorrect. My point was that investors cant get as much I/O money as they used to be able to , nor can they get it for terms as long as they could previously. Most will be offered 5 years maximum, with a requirement to be reassessed for any extensions. This is very different to how it has worked previously. This means traditional models that relied upon 10 or even 15 years of I/O debt to aid in the accumulation phase ( using "actuals" for servicing) and then to aid with keeping holding costs as low as possible as they waited for their properties to mature , wont work for most investors moving forward. But I havent ever stated investors cant get any I/O loans whatsoever. You have drawn the wrong conclusions from what I have posted.

Incorrect. Whether you borrow I/O or P&I, your capacity to service the loan is assessed at a senisited P&I rate. You are applying pre APRA logic. It doesnt work like that anymore. The only real exception is Liberty.

See points 1 and 2 above. It doesnt matter whether there are more lenders ..if you can only borrow X amount of money because of sensitised assessment of debt, its irrelevant whether you are trying to borrow from lender A, B, C or X, Y and Z.... borrowing capacity is borrowing capacity. When you reach capacity you reach capacity ... The only real exception is Liberty. What matters is finding a way to improve your borrowing capacity. I believe debt reduction is an effective way to do this.

If new lenders entered with a Liberty style of servicing calculator you may be correct, but thats unlikely as any new lenders entering are extremely likely to be ADI's and will therefore fall under the APRA requirements for assessment rates and I/O quota's.

Sure, but again it's not really relevant. Borrowing power is what's relevant if you intend to accumulate more resi investment properties. See point 3

I didn't suggest it would change. I suggested that it means the RBA will feel less need to increase the cash rate as quickly as many had been predicting, and that they are jawboning about banks hitting their backbook but are secretly probably quite happy with the banks doing all the rate lifting without the central bank needing to do so and drive the AUD up. But please understand - banks making bigger NIM's ( net interest margins) per dollar lent doesnt improve YOUR ( or anyone else's ) borrowing power.


So we come full circle...

 

Agreed Euro... I think this point is under appreciated....

Previously banks profit and our borrowing power were aligned interests.

NOW banks make more profit by decreasing borrowing power and lifting margins. Interests aren't aligned anymore!!

Actually very well constructed by regulators / banks when you think about it.

 

In a nutshell: good-bye speculator (debt-fuelled gambling on asset price rises), hello investor (buying assets for their anticipated yield).

 

I have been saying for a very good while now... the most effective approach for this credit environment is to approach it as you would approach a share portfolio. Invest for yield and reinvest the dividends to pay down debt . It creates equity and it creates borrowing power, which are the two key ingredients to the cake everyone wants to bake....

This doesnt mean there wont be growth, but the probability of future cycles being anything remotely like the cycles of the past is very low. VERY low. The ingredients just arent there any longer to bake the same cake.

 

Almost everything about the mechanics of mortgages, securitisation and what APRA is seeking to achieve is under appreciated by the forum. Still so much staunch denial of the changes and their effects. Either its ego, pride, stupidity, or I dont know what.... perhaps its because these changes have take 2 years to start biting?

Whatever the reasons, cash flow and debt reduction are smart plays in this environment - end of story. But this is a mass cultural change and it will take time for people to stop being prisoners to that reality ( resisting ) and start being volunteers to it ( embracing) . Within the next few years you will start to see increasing numbers of investors cop on to the fact they need to start managing their debt much differently ... my clients and I are already well ahead of the curve. Others should be thinking hard about doing the same. All it takes is to add 1 or 2 cash cows as the next portfolio additions. No one needs to sell and start over... just make an adjustment. Its fairly straightforward and will reap long term rewards.

 

I agree with this if things continue as is.

But I think there's also a small possibility of restrictions being wound back somewhat if households start defaulting en masse. The current environment is not a fait accompli.

If history teaches us anything, it is that nothing is ever permanent.

 

Things to consider
Is outside world growth middle class growth.
Our neighbours with aspirations

You saw what the Chinese middle class and wealthy have done to the world property prices and In Australia. They are just 1 of our major populated neighbours.

Indonesia Tiny country 260,000,000 people growing middle class
India Relatively small land mass 1,324,000,000 people growing middle class
Pakistan small land mass 194,000,000 Developing country longer term potential
Thailand small land mass 65,000,000 Developing and growing middle class


With 50% of the worlds population at our doorsteps. Australia being very large land mass with a lot of room good quality air great quality produce.

They will come. They do have money. and they don't give an F about APRA.

Not saying you don't have to use your brain to invest . But the constant negativity of people proving they are right is also not really necessary.

 

Some other meaningful variables
GDP per capita - USD$500-2000 per person for above examples...
Foreign capital controls - eg rise of Bitcoin

THey might not give a F about APRA but they also earn 25 bucks a month and their government will throw them and their whole family in jail if they are caught moving any significant money overseas...

 

reminds me of the saying... They aren't making any more land!!

No doubt true, but meaningless in and of itself - so go buy in Broken Hill then

 

That is just absurd.

There is no Indonesian law which prevents the people to invest in other countries.

GDP per capita might be small, but there is a very wide wealth disparity. Millions of the people are on high income even though majority are earning small amount.

 

Good question - what is the max term available for I/O? It may be the I/Os start ending fairly quickly

Interesting infographic from ASIC here as to how much more people pay on I/O (and how many have I/O for owner occ. as well ) Australia's interest-only mortgages | ASIC's MoneySmart

 

Thanks qak,

Based off of that graphic, the average I/O mortgage in 2014 was $430k - that figure would certainly be larger in Sydney & Melbourne today.
RBA states that I/O loans make up 23% and 64% of O/O and investor lending - certainly not a small figure.

If anyone has any data on the distribution of I/O loans or the proportion of I/O loans that could not be refinanced, I would love to see it!

 

Did you even check prior to replying.
Thai GDP per capita is a just under50% that of China.$3600 indo -$8100 china.
Poor chinese with $8000
If you actually understood the working of these countries you would understand how much wralth is i them.