Renewing I/O In Current Environment

Locking it in might be the pun of the day

 

This!

Not so much a change of heart, but it would be a great idea for the brokers on this forum to collectively discuss and lobby for sensible changes to lending policy. I'm referring to the broad topic of improvement to lending policy (and not specifically IO), whether it be for lending to owner-occupiers/FHO, investment or residential development lending. Changes that apply income / expense tests in a more sensible/pragmatic way, increase competition between banks / non-banks whilst still maintaining an appropriate level of prudence.

 

I think you'll find this is precisely what APRA and ASIC believe they are already doing, and precisely why they wont be undoing it.

 

@euro73 It's rare a broker so strongly advocates debt reduction. Usually it's the opposite.

 

It used to be that the opposite was the best/easiest way to build a portfolio. Not so any more. Good brokers advise the best way to achieve the clients desired outcome, not their own desired outcome.

 

Yes, but how much consultation has there actually been with brokers and for that matter borrowers. This has largely been a discussion between APRA and the banks, with probably little or no consultation with borrowers. How do you actually make the lending products better?

 

It's a bit more sophisticated than that @Wukong. I advocate debt reduction specifically for the purposes of portfolio expansion... There is a genuine method to the madness
.

 

Slightly off topic, but CBA just changed their criteria for converting P&I loans to IO. Historically, clients could apply for max borrowing as P&I then revert to IO straight after settlement. Now, there is a period of time the borrower must wait before converting the loan.... Point: we are in an ever-changing environment and you MUST plan ahead because it's only going to get stricter...

 

All brokers are members of either the FBAA or MFAA who are supposed to be, in part, lobbying for and on behalf of broker industry. I think it costs me around $400 per year. (I wouldn't be a member if it wasn't a lender requirement.)

 

Agree Jonathan D - lending does change, and lending policies are being used more and more as a tool to control property market/lending growth (even if thats not the stated intention).

Lending growth and expansion > prices rise fast = regulators get anxious and start promoting a shift in policy/pricing to incentivise different behaviours and market outcomes.

Some lenders like CBA, Westpac and even ANZ offer pretty generous terms for extension of I.O periods when they fall due for renewal - so long as they're not at the end of their loan period (e.g. repeated it a few times).

This offers investors scope to manage the timing of I/O expiries. However, in an ever changing regulatory environment, its quite unpredictable to think that this may be the case in 5 years time.

 

When it comes to macro type concerns - like financial stability and lending policy, most often constituents calls fall on deaf ears. Even the government of the day has limited powers in intervening here other than putting pressure, etc. E.g. APRA set lending policies independent of government direct instruction, RBA set rates based on economic indicators, etc)

MFAA/FBAA have more success in micro type issues - e.g. broker remuneration, impact of the broker market on consumer outcomes, etc.

 

Thank goodness it's a lender requirement. Without members these associations would cease to exist brokers as a community would have only their aggregators to rely on (and they're less useful than the associations). The MFAA does a lot more for brokers than they're given credit for.

 

Yeah I hear you, but you know what? We can sit at our PC's and talk about this all night long, but the ship has long sailed. And there is likely more to come.

We went from 70% of loans being P&I and 30% being I/O, to over 53% being I/O ...in just 3 years. And all in the lowest rate environment ever, and at the highest price points ever, and in the lowest wage growth period in 30 years, and right as the mining capex was coming offline.

APRA doesnt give a **** about dwelling prices, unfortunately. It cares about banking sector stability.
ASIC doesnt give a **** about prices either - it cares about responsible lending practices.
Neither regulator really has dwelling prices as their driver... they just want more buffers in the system.

That's why you have 10% I/O speed limits. Thats why you have I/O repricing. That's why you have sensitised assessment rates. Thats why you have significantly higher HEM's. It's all about APRA and ASIC believing that some serious deleveraging and debt reduction is needed within the banking balance sheets, in case of some GFC type event happening again. And it's also being driven by global regulatory demands.

 

What sort of a broken business model is that ? sheesh

 

That goes towards having meetings to discuss members fees and have a chin wag etc all with full catering and broad range of premium beverages ! lol

 

Haha - I'll tell you in a year or two

 

I wonder how many brokers will drop out after Sydney & Melbs peter out or fall off a cliff ? mmm

Regarding IO , people should look at the rate they have now and can get, it has been dropping for a while, look at fixed rates, and calc if you can do fixed for P&I now, or pay an eqv amount into offset. IMO of course.

 

ALL of these changes just further promote those looking to use property as an investment vehicle to become active instead of passive.

I have never been one for large portfolios, I would prefer 1-2 that can be manufactured and then offloaded, reduce debt, rinse and repeat. Large portfolios IMO are somewhat of a ticking time bomb and someone just cut the wrong wire and the counter went down by 5 minutes.

I love the idea of "making money" and welcome these changes pushing out "lazy investing". I also love property and whilst I have always said I do not think its the vehicle to take me to the promised land, I know it can assist in funding business ventures which is the vehicle that will.

I think all these changes are for the good, yes flame on people! But they are being put in place to protect us from ourselves. If you want to go out and make money on property, then you still can, but be prepared to minimise your portfolio, roll up your sleeves and start working for the gains, instead of sitting on 5 properties and enjoying the ridiculous growth you have.

I am not saying everyone needs to be a property developer, their are loads of other strategies you can employ to either increase income to reduce debt or manufacture larger gains which can then be offloaded to reduce debt.

As long as you have a decent job, ideally with a partner then almost none of these changes are going to mean a thing to you if you hold your PPOR and another one or two properties.

 

Excellent comment, Albanga! Am also a big fan of manufacturing growth rather than 'buy and hope'.

Would you mind sharing why you think the below?

I personally do see property as the best vehicle of them all

 

I don't believe property comes anywhere near business in terms of a vehicle. I don't however mean being a minor shareholder in a listed company. I am talking about being an owner, director, major shareholder of a very profitable business. Something that you have personally grown or invested into for a percentage of ownership that becomes very profitable.

I have friends who are major shareholders in businesses that see them get annual dividends of 200k on top of salary and the business end game is to always become successively successfully and sell on the back of a number of years solid returns. You can own 10% in a business that sells for 20mil and your never working again.

Property is a great vehicle, no doubt! Manufacturing property is an even greater vehicle, but it would be extremely hard to turn the profit you can via business with it, unless of course you start getting into major developments at which stage you actually cross into being a business