The IO property cliff disaster? Fact or fiction

Discussion in 'Property Market Economics' started by Sackie, 1st Feb, 2020.

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  1. Sackie

    Sackie Well-Known Member Premium Member

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    Quite a few people were banging on about the IO cliff is coming, things will only get worse APRA killed the markets etc etc. Since Melb and Syd have just had mini booms with strong signs ahead, my question is has this so called cliff now disappeared? Less relevant? Was it over exaggerated by those yelling it out?

    It just seems very interesting.... not that long ago the doom and gloom on here was thicker than a blonde using white out on a computer.....and now all of a sudden since we've had booms again, sentiment on here has changed greatly. Also, no amount of quantitative data was able to predict this shift in any great way.

    Ok so back to IO ending period question, do the economists on here still believe there's a cliff out there waiting to destroy the property markets with mass delinquencies etc etc ?
     
  2. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member

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    Many of my clients have chosen to sell down to ease exposure and buy into the lower rate PI piece, to get peace.

    ta
    rolf
     
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  3. datto

    datto Well-Known Member

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    Nay.

    It was a furfy to scare people.

    Just like the ones about Mt Druitt property crash. It didn't happen.

    Long live the Druitt!

    [​IMG]

    lol
     
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  4. kierank

    kierank Well-Known Member

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    Well, I wasn’t one of them :p.

    The good thing about being an old fart, B+H investor from the last century is that none of this stuff matters.

    In my lifetime, we have seen wars break out, we have seen financial “end-of-the-worlds”, we have seen deadly virus outbreaks, we have seen planes fly into buildings, ...

    In other words, a lot of really “scary” things. Yes, the world might trip and shake, albeit for only a short time. But it always picks itself up and powers forward.

    But we can’t control or influence any of this. So, it really doesn’t matter.

    What matters is what we can control and influence. The important thing is set a plan and execute it.

    The rest is just noise and I agree with you - there was a lot of noise on PC.
     
  5. Scott No Mates

    Scott No Mates Well-Known Member

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    He's got 3 teeth too many to be from Mt Druitt.
     
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  6. albanga

    albanga Well-Known Member

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    I always said and still maintain it was drastically overstated. Just more fear mongering from the media with little considerations for the impacts in the real world.

    @Redom wrote a really good post about why it was overstated. In a nutshell the fear took absolutely zero consideration into people’s contingencies.

    OH and the big one! The real kicker!
    The fear mongering was around the time APRA was in full lockdown mode. Since then the tap has been well and truly turned back on. Heck it’s almost just as easy to refinance as it’s always been and getting easier with each rate drop.
    But then again some “experts” never thought that was happening either <insert sigh>.
     
  7. MTR

    MTR Material Girl Premium Member

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    Be interested to hear from brokers on this topic and how their clients managing this

    According to my broker still much harder to service debt since changes Have come into play.

    Many investors rationalising debt, not a bad idea, dependent on LVR/debt and personal scenario

    i think difference is interest rates are at historical lows is attracting fhb, but lets not forget not all markets in Australia are booming some are flat or going backwards

    For me business as usual, next project targetting fhb market
     
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  8. TMNT

    TMNT Well-Known Member

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    I at the time did the maths and realised that my repayments going from io to pi would mean i had to tip in somethinf like an extra $5k per month

    So i had a bit of a panic and sold a few, of which there were other reasons to sell too
     
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  9. Darwin55

    Darwin55 Well-Known Member

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    It certainly made me concentrate on knocking some debt down especially while rates are so low.

    Can only be a good thing I suppose
     
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  10. Archaon

    Archaon Well-Known Member

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    Investors that, under the new apra rules, didn't qualify for the debt they had, with 5 years IO ending shortly and no way to refinance were the ones selling.

    I noticed it locally, with a colleague.

    There was alot of volume end of 2018 early 2019, which is about when the IO bubble burst.

    Investors make up a small percentage of the overall market, yet I high percentage on PC, so the sentiment would be skewed towards investor mentality and not translate wholly to the Property Market IMO.
     
  11. truong

    truong Well-Known Member

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    My friend the big investor I wrote about in this post never sold any of his properties. He refinanced to PI at lower rates ahead of the forced switch and used his offset accounts to pay for the slight repayment increase. With successive rate drops he should be back now to a healthy position.

    Many people had redundancies that they were able to deploy resulting in a leaner use of money. All in all it was a good thing for the economy going forward and, to be fair, APRA did their job in this instance.
     
    Last edited: 2nd Feb, 2020
  12. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member

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    Adaptability indeed

    ta
    rolf
     
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  13. Jess Peletier

    Jess Peletier Mortgages, Finance & Property Strategy Aust Wide Business Member

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    It also took no consideration of the fact that MOST investors are simply able to refinance their loans out to a new IO period.

    Or a new 30 yr P&I...

    It's very rare that I come across an investor who has no option but to sell...I think I've seen 2 since the whole APRA thing came into play.

    Let's be real - most property investors in Australia have 1 INV property. It's not going to be an issue for those people.

    The amount that have 4 or more - where it all starts becoming quite tricky - are very few and far between.

    Not here on PC of course, we're not the norm and I'm sure most people here realise that.

    It's hugely overstated - but does require planning and more conversations around risk management now.
     
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  14. kierank

    kierank Well-Known Member

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    This was my exactly situation.

    I have already posted about it on PC but I had $1M debt (two loans) whose I/O period was expiring and that bank wanted me to go P&I. They wouldn’t offer me I/O.

    So I went across the aisle to another bank. They offered me two loans, 25 years terms, 5 years I/O, at lower interest rates than the first bank. So we moved our business across the aisle.

    Happy days. Nothing to see here :D.
     
  15. wilso8948

    wilso8948 Well-Known Member

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    Haven't heard from a certain someone in a yellow skivvy for a while.. Must be too hot.
     
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  16. MTR

    MTR Material Girl Premium Member

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    when refinancing the bank valuation is critical. For investors whose properties have gone backwards refinancing wont be an option

    in saying this I refinanced one property in Perth recently loan $1.230,000 IO 5 years 3.56%, which is lower rate than original loan....so valuation was OK and was able to service debt fortunately.
    Did sweat on this one:)
     
    Last edited: 2nd Feb, 2020
  17. euro73

    euro73 Well-Known Member Business Member

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    The challenges for those carrying multiple IO loans didn’t go away . There are still residual structural changes to policies that make holding IO forever a non starter for almost all borrowers. They are still required to reapply or refinance at the end of IO terms . Assessment rates are still loaded and done using P&I remaining terms . What saved the potential cliff becoming a real problem was the multiple RBA cuts . It provided sufficient cushion effect to turn the cliff into a speed bump . It allowed many to refinance , and those who couldn’t were migrated to P&I rates they weren’t a huge leap on their 2017 or 2018 IO rates . I wrote about it extensively , early on following the APRA changes , where I predicted the RBA would likely have to cut to provide the cushion . That’s exactly how it went. Combined with a very effective suite of APRA policies , it resulted in an orderly migration of IO to P&I with little collateral damage . If they hadn’t pushed the rate cuts through we would very likely have seen a whole lot of people in a whole lot of trouble and the current recovery wouldn’t have happened . It’s been , and will be especially evident in the last 6 months and next 6 months as much of the peak IO debt from late 2014 /early 2015 comes to the end of its IO terms. It just hasn’t hurt like it could have . So well played to all.

    But some caution. The RBA well is pretty much dry now and people are starting to leverage up again using IO .....don’t ignore the lessons of 2016-2019. Make sure you manage your cash flow and debt reduction . There are only so many times you’ll be able to kick the IO refinance can down the road . It isn’t going to be something you can do over and over Holding IO for 10,15,20 years like previous generations were able to, isn’t going to fly unless you can pass servicing calcs on 10 or 15 year P&I remaining terms . With yields capped at most lenders , only those with huge incomes will be able to do that. So make no mistake - P&I will eventually catch up with almost everyone. Don’t be fooled into believing the P&I cliff has gone away. It’s just been kicked down the road . Be sure to factor that into your numbers or 5 years from now we will start hearing cliff stories again ... but with more debt and lower yields .
     
    Last edited: 2nd Feb, 2020
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  18. MTR

    MTR Material Girl Premium Member

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    Hit the nail on the head
     
  19. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    Many are still within the IO period too. It hasn't been 5 years yet.
     
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  20. euro73

    euro73 Well-Known Member Business Member

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    this is true . Lots of lenders didn’t change their calculators until late 2015, so you could argue late 2020 is where peak IO runs to. I would suggest that’s not even accurate though. CBA and WBC and NAB , who had HUUUGE volume at the time and were getting all the IO business because they didn’t change servicing calc policies until well into 2016 , present a deeper potential risk. Their aggressive IO lending right up to mid 2016 means mid 2021 is where peak IO hits P&I . But I still expect the cushion effect that’s now in place will allow most to avoid trouble
     
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