Structure - is having all loans interest only still doable

The Bank knocked me back the other day on an investment loan.

One of the reasons appears to be that all my loans are Interest only including my PPOR ( I have an offset account)

I worked out my LVR at 77% but the bank appears to have a higher LVR which is over 80%

Financially my figures have never looked better so it came as a surprise even with APRA coming down on interest only loans.

If I had paid P & I on all my loans from day one at 7% interest rate, the money in the offset account would cover the principal payment required.

I am going to go through this with my broker but are people still able to structure using interest only or are you converting some loans to P & I?

Do you clearly need to be under 80% to use interest only?

 

At 80% I/O loans aren't a problem with most lenders on the PPOR, no problem at any LVR for investment loans.

There are a few lenders who are refusing I/O for PPOR loans. We've been able to negotiate this away at 80% but they don't budge above that.

The banks LVR calculations might also mean that your loans are cross collateralised?

 

My loans are not crossed.

I do not know what the figure the bank has for total LVR but there was a comment about not much equity.

I did get the RP Data report for my PPOR which did value it low. Conservatively my place is worth $750,000 RP data had it at $660,000

My loan plus line of credit would be over the 80% of the $660,000. I could close down some of the unused part of the line of credit to get under 80% of the RP Data value.

 

Your broker should have a copy of the valuation to verify the figures you need.

Several lenders tend to default to a desktop valuation. This can usually be overridden which might reveal a more accurate result.

 

IO on all is still doable, but you will reach the point where it will hit the wall. Then you would want to reconsider whether the PPOR should be IO. If that doesn't help then perhaps PI on one or more IP loans will work.

 

I assumed it was all desktop to get a feel for the whole situation. No valuation was done on PPOR.

Nothing was changing on the PPOR. This loan was separate to the PPOR.

 

Then theoretically the if nothing is crossed, the PPOR should have no relevance on a new IP loan. Lenders generally aren't having an issue with stand alone investment loans being IO.

Good in theory, but it doesn't always stand up in practice. Chances are they're already looking at you as a high risk based possibly on over exposure through multiple loans, or possibly the catch all, 'rent reliance'.

This could be a good time to diversify to a different lender if possible. Lending is not just about the numbers, there is some subtilety to it. Having a single lender knowing too much can work against you.

 

If your loans are all with the one bank then you are cross securitised whether you like it or not and regardless of what they tell you. Standard mortgage documents have an "All Monies" cause which means that any asset can be called on to satisfy any debt. They could foreclose on your PPR if you default on your credit card.
The only way to avoid this is to use different banks.

 

Thanks Peter.

If I can not get the answers from my current broker (which make any sense) I might have to come and see you and have a chat.

There is something they do not like. Maybe I have hit the wall as Terry has said but if that was the case the wall is not that far from the beginning of the journey.

 

Unfortuantely post APRA, many people are hitting that wall after property number 2 or 3. There's plenty that can be done if you plan right from the start, but it's difficult to plan ahead when the targets move so quickly.

 

Restructuring existing loans can help, including:

1. Using offset money to pay down PPOR debt
2. Changing PPOR loan to PI
3. extending loan terms
4. shortening IO periods
5. paying PI on IP loans.
6. removing non-owner spouse from loans

etc

 

I could do all the above, except 6 (as I have no spouse). I did not think to do any of that as discussions with the broker beforehand it appeared what I wanted to do was possible. From my end I saw good income and good cash flow (from business) and therefore I saw no issue.

 

Well, you shouldn't do any of those if you can avoid it (especially 6, getting a spouse). But just liaise with your broker on what you could do if it necessary to do.

 

Terry's suggestions are all great suggestions under the right circumstances, but don't simply take it as 'these things will improve serviceability'.

In certain scenarios each of those comments would be a significant disadvantage for an investors serviceability.

They're all fairly easy to switch too (I had an email offer for a Russian bride this morning), but most are quite difficult to roll back. Make sure you get very specific advice from a broker before doing any of these things.

 

At the end of the day the bank could call on any security, but there is still a big difference between an all moneys clause and multiple properties mortgaged for loan one - and that the is ability to refinance or sell. Where one loan is secured by one property you could simply sell the property and pay out the loan without involving the other properties. No need for the remaining properties to be revalued etc.

of course this has to be done before you start defaulting otherwise the mortgagees would have you cornered.

 

Hahahaha the catch with number 6 is that if they are working they increase servicing but at the same time they also reduce equity

 

It would depend on the spouses debt levels. They could make servicing worse.

 

Sounds like it is time to spread your properties over more than just one bank.

Some lenders get nervous once exposure exceeds 1.5 mill regardless of LVR.

In regards to valuations banks usually go with the val report on file when property was purchased or refinanced. If they are dated then will go the desktop route.

Getting new vals done may work for or against you depending on the micro market your properties are in, ie. have values decreased, increased or stayed steady? This can also be effected by the valuers opinions.