Repayments to surge 40pc as debt resets

Looks like the RBA is now warning about the subprime IO loan resets:

RBA flags dangers of $480b in interest-only loan resets over the next four years - AFR, 13th April 2018

Almost half a trillion dollars in interest-only mortgages will convert to principal and interest loans over the next four years – jacking up monthly repayments for almost 1.5 million borrowers by as much as 40 per cent and creating a fresh threat to house prices.

In a sign of unease within the Reserve Bank of Australia about an unprecedented situation, officials for the first time published figures showing that around 30 per cent of all outstanding national mortgage debt will be subject to the reset, which has been likened to the wave of adjustable-rate loans that triggered the 2008 US subprime crisis.

I suspect as all these loans reset over the course of the next four to five years, downwards pressure will remain on property prices.

 

RBA: $120bn loans per annum on average are due to convert.

Media: $480bn of loans will convert.

Bit of a leap of faith.

 

I'd imagine a large portion of that figure would still have access to refinance P&I over 30 years

 

They also do not mention by going P&I ...they will get lower rates...but suspect 10-20% of investors..would need to sell....winds are change are comin'

 

I think part of the problem is that in 2-3 years time its quite possible that interest rates may have raised by at least 1-2%, and around the same time they are being pushed into P&I loans.with higher rapayments

 

read this article as well.

now RBA, APRA, ASIC .... see the issue with IO loan reset, and many investors may not be able extend the IO term or refi to extend, the problem is real. so What will RBA, APRA, lending institutions and other government do to deal with this?

 

Both seems correct if taken in context: RBA - $120 bn per year, media - $480 bn in the next 4 years.

 

$480bn due for reset over 4 years, but $480bn will not be reset over 4 years - a pretty big difference glossed over by Fairfax.

 

Is there any reason why you can't pay the the principle payments from another investment loan or am I missing something? Of course, you would have to have that facility but in my case, my PPOR is the priority.

 

Have a friend in this situation.
IO coming to an end and has also split with ex so refinance is difficult solo.
Had place for auction but passed in so now seeking offers.
Should have some equity as bought 8 years ago.

 

Given the above, repayments could jump more than 40%?

 

Yeh I'd imagine most get refinanced. Plus a lot of Sydney/Melbourne would now be sitting on some equity.

 

Well and good to say re-fi. But there will still be a lot who don’t qualify for what they have now under the new lending rules.

 

54%. That's the difference between IO and P&I monthly repayments if the loan re-sets at the exact same rate after 5 years IO. But allowing for the slightly lower rates on offer for Investor P&I...let's call it 40-45% shall we? Its really just a matter of semantics. Whether it's 40%. 45% 54%. None of them are 10% or 15% or even 20%. They are all HUGE increases... and there is no way rental increases will possibly cover them...

That's why I called it the P&I cliff a few years back. That's also why I have long advocated the sale of a non cash cow or two and replacing it with a cash cow or two.

1. It will help you reduce debt during its IO term, where it will be pumping out 8K CF+ or better

2. It will help you hedge against future rate rises and the P&I cliff after 5 years...

Holding one IO loan mightn't be too bad, but this is definitely not the era to be holding several IO loans secured by low/modest yielding properties. Instead, this is the era to be holding strong yielding assets that can aid debt reduction and survive a P&I environment.

No regular reader of this forum can say they haven't been well warned.

#decadetodeleverage

#cashcowskilldebt

#aheadofthecurvesincebeforeAPRA