Repayments to surge 40pc as debt resets

Maybe your friend can Nimble it, and move on.

And when Nimble ask for their the return of their high rent money, your friend can respond that he/she/they "...have moved on..." as originally advised...

 

So much of the Sydney growth was enabled by IO that I can see how it is going to go flat as tack for some time.

On the flip side, there is going to be a lot of upwards pressure on yields. IP Principle payments are a huge barrier to entry for those who have a PPOR mortgage to pay.

This is still so hideous to so many people (a lot of young professionals in Sydney for example) that I think something will have to change...

 

People who maxed there borrowing capacity 3 plus years ago and there income has not gone up by 20k OR paid down there debt by at least 20% wont be able to refinance with the big 4 period!

These ppl actual repayments will increase by 25%

My tax accountant client has 8 properties in Sydney and they cannot refinance and have borrowed money from family to make repayments...

I think more ppl than we think will get caught out and belt will have to tighten and that's not good for the economy either...

 

If they bought 8 properties in Sydney more than 3 years ago, it is very likely that they have got a decent chunk of equity. Just need to sell 1 or 2 or 3 and they can reduce their debt significantly.

 

That's why I said they need to sell. They should only not sell if then can comfortably keep all properties with P&I even if the interest rate go to 7% and factoring in cash buffer required for major repairs and other emergency situation. Not like need to borrow to make the repayment with the current low rate. At least it is the way I plan for my portfolio. However, mine is small size, not 8 Sydney properties.

 

There is the option to convert to P&I now and fix in a low rate. I am looking at this for my last IO loan.

 

I think what you will find is that the smart investors have already taken those steps. Taken their profits and reduced their debt. It's the speculators who are hanging on by their finger nails and eventually the market will force them to take action.

The longer they wait, the more their equity will reduce and the greater the volume of properties hitting the market.

Markets go up by the stairs but they come down by the elevator.

 

Using the Sydney market as an example, I don't think the elevator will reach the ground floor of 6 years ago that quickly.

 

What about for property in the rest of the country outside Sydney?

 

Negative feedback loops... when the entire market of over leveraged vendors try to offload, fantasy equity evaporates

 

This is what those outside Australia were commenting about. Punters without solid cashflow using unrealized equity in parents homes to secure 2nd 3rd 4th...10th investment properties

 

Time to buy PEP shares?

 

Not that bad. Depend on the timing and the price they bought. If you have 50% equity, I do not think it will become zero. If you have 10% equity, then it is a different story. And that's why they should sell now not wait until the market crash. But again, not sure if the whole market will crash or just becomes stagnant.

 

While its certainly an issue, it is worth remembering how this situation will actually play out and the transmission from a 'repayment increase' to a 'forced distressed sale'. There are quite a few loops to go before it leads to forced sales. The forced sales/market crash hysteria is an easy conclusion to come to, just watch the big short and the negative mania can come in. Nonetheless, Australia is structurally and legally different, the incentives are different and there's far more desire to keep hold of assets than in previous debt bubble bursts.

There's certainly a material amount of loans that will trigger repayment rises in coming years, RBA has provided some guidance there. Of this ~$120bn a year, borrowers will fall into one of four different baskets, from best to worst below.

Basket 3 is the interesting one, as its generally a catch all for many borrowers who got their loans in the first place. I.e. if you haven't had a material downward change in your situation, you may well fall into category 3. Its certainly not a pretty option, its risky and not as cheap. But it does change the repayment increase from 40% to 5-10%, which should be well within most borrowers sensitivity analysis.

From the RBA's FSB report, there seems to be basket 5 too - renegotiate settlements with your lender who provided loans irresponsibly. Not sure how this will work, it sounds more legal than finance, but i assume it'll be some mechanism to stop borrowers being forced to sell.

Different baskets borrowers will fall into:

1. Make the additional repayments when the loan converts to principle and interest repayments;borrowers can simply adjust their situation and make the additional repayments. Many borrowers have already begun preparing for changes and done this already.
2. Refinance their loan with a mainstream lender and extend their interest only term; this is only available to borrowers who can pass current eligibility criteria. As a guide, for every $1million in debt borrowers have, they will need an additional $40k in household income to support the same level of debt today vs 3 years ago. With little to no wage growth, many may no longer qualify.
3. Refinance their loan with a non-bank lender; for those who are desperate to maintain their interest only period but fail servicing with mainstream lenders, they can go to the non-bank lenders to secure a new IO period for another 5 years. These lenders have less restrictive lending criteria, but interest rates are usually 0.50-1% higher.
4. Sell; when all else fails, borrowers can sell their properties/investments. This is unlikely to lead to large scale losses for lenders or borrowers, as house prices have grown rapidly and data shows Aussie’s are on relatively low LVRs.

 

Basket 1 will hold a diverse range of borrowers, from those who responsibly planned for P&I reversion, to those who didn't plan and are suddenly stuck with negative overall cashflow but refuse or are unable to adjust their lifestyle to cover the shortfall.

At the tail end of this range there will be many who will choose to "hold and pray" - after all, property only goes up in value right?? And negative gearing is here to stay right???

 

There is another group not mentioned but I imagine it is small (Basket 0?). I am currently looking at switching my last IO loan to P&I to access much better rates and also lower fixed rates. I had loans that were going to revert in 2020 as part of the IO "cliff". I have one left that I am looking to switch this month. Besides lower rates, switching early means my repayment will be $85 per month lower (27 years vs 25 years). It's not much but it is something.

Incidentally, one of my IO loans was reverted to P&I two years early for no apparent
reason. I asked the lender why but they don't know. In any case, the repayments on that loan are 33% higher, which sounds like a scary amount. However, the loan is relatively small and the increase equates to $145 per week. I guess that would not be ideal if not planned but since taking out that loan I have increased my gross rent by $600 (gross) per week in anticipation of higher interest rates.

There is going to be a complete range of groups from people switching early to access better rates and lower repayments to those who are over-committed and will be forced to sell one or more properties. Then there are those with cash sitting on the sidelines waiting for it all to unfold. It is going to be interesting to watch.