Renewing I/O In Current Environment

This is probably a question for the brokers.

Lets say John Smith has a portfolio accumulated pre-APRA. All loans are interest-only for now. He was at or near serviceability wall.

Over the next few years the loans on the existing portfolio will start to roll over to P&I. Some lenders may allow I/O to be extended without much hassle, but for the sake of discussion none of John's loans fall under these lenders.

Without selling down, what options are there to renew I/O on existing loans, given post APRA the existing loan size would most likely fail serviceability calculators?

 

Basically little options available.

 

If there's no servicing at all with any lender it's going to be tough - you need to plan ahead.

 

We're reverting to p & I on one of ours that's just come up.

 

It's even worse than some people think. Loans are being assessed on the remaining P&I period, so most lenders are assessing on a 20 year period, not the original 25 years (assuming the initial IO period was 5 years and you're renewing for another 5). The bar is higher for an IO renewal than the original application, even without the new credit restrictions.

A LOT of people aren't going to be able to renew IO periods over the next few years. In some cases they might be able to refinance elsewhere, but a lot of people can't technically qualify for the loans they've already got.

We're currently putting in place plans for some clients where they start to pay off the loan, or they'll be selling properties after a period of time. Beyond that there's not a lot that can be done.

 

A last resort may be to refinance to some smaller lenders who still have reasonably decent servicing calcs - but that generally comes at a cost (higher rates in particular).

I agree with the general sentiment above though - for a lot of investors with multiple properties it's going to be quite difficult renewing IO periods.

Cheers

Jamie

 

The cost will likely be a deterrent to this, but the longer term implications of this could be fairly aweful as well.

The interest only cash flow of the private funder might be better, but the interest rate is going to be higher. But what happens in a few years when that interest only period expires?

At that point you'll have higher rates and P&I repayments and nowhere to go. All you've done is delay the issue, possibly making it worse in the long run.

Make decisions based on your long term strategy, not on short term relief.

 

Put rents up at the renewal of every lease.
Earn more money in preparation.
At the end of IO period and it's obvious there'll be no extension offered/available, refinance to P&I with another lender for a fresh 30 year term to keep monthly outgoings as low as possible.

Will any of these points work guys?

 

Yes - they all help.

 

I think it might be of help to list which banks are doing what, at this point in time. We all know this may change next week, but all we can do to prepare for the future is to know exactly what we are up against NOW.

For instance, Johnny has four current lenders and all his loans are IO. All his loans were 30 year loans with the first 5 years IO. He has a mix of start dates, meaning that some of his loans are only 1yr into the 5, others are 2yrs, 3yrs, 4yrs, and some are almost 5yrs old. His banks are CBA, Westpac, ANZ & Suncorp. If he is aware of which banks are forcing P&I, and at what stage, he can best prepare for the future.

 

You can only put rents up if the market will support it.
Otherwise you will have an empty property and NO rent.
Don't rely on raised rentals being automatically possible.
Marg

 

I don't rely on it. But it IS something that I do for my properties at every lease renewal time. Even if it's only $5 or $10 a week. One day my luck may run out and the tenant may not want to renew, until then I'll push my luck. Then again I may have bought in areas that support rental growth. . . .

 

Until rents go down, as they have been known to do over the years.
Marg

 

Correct. But until then, cheers.

 

I just had 4 months left on a i/o loan with anz, and had it renewed for 3 years as I/o on fixed 3yr 3.99%, +300k, at 90%lvr. I do have another property loan with anz but that is and always has been P&I, the rent pays for the p&i and having it as p&i i think has helped me get the other i/o extended. Its lvr is around 72% of purchase price or 65% to current market price.

 

The only way to keep your repayments minimised is to keep your debt I/O. The challenge- as I have outlined on post after post for a long time now, is borrowing capacity, and requalifiying for extensions to IO terms.

You were assessed for existing debts under pre APRA rules, and when you require I/O extensions you will be assessed under post APRA rules. This means that if servicing doesnt work, you have a problem.

In order to be confident of avoiding problems, you need your rents or income to go up $ 50-60K per million of debt, as this will restore your pre APRA capacity. As peter has suggested, its an even worse situation where P&I and 25 or 20 year terms come into the equation...

 

It's A start though. Obviously there are plenty more things you can do, but something is better than nothing.

Better than burying your head in the sand waiting for the banks to come and start selling your assets FOR you. I've got 4 years left to work it out in my case.

Anyone else have some positive suggestions?

 

There are 2 real options if you wish to remove selling from the equation

1. Increase income substantially by @ 40-50K per Million owed.

2. Reduce debt


There arent any short cuts or work arounds to this, really .

 

Yes its a start... but unless the changes to income are fairly significant , its going to be a bit like swimming against a very strong tide... you just wont get very far... so it has to be more than just a start to really be of any use to you , or others who might be facing similar situations...

As I see it, when you cut to the chase, investors in this situation have the following options

Plan A - increase income substantially.
Plan B - reduce debt aggressively
Plan C - deal with P&I
Plan D - sell up.
Plan E - lobby the regulators for a 180 degree change of heart.

 

I'll take A,B and C to assist B thanks Eddie. Lock it in.