The IO property cliff disaster? Fact or fiction

Yes that could be an option I looked at too

Good question, I am guessing gross? Not sure

 

I am buggered either way.

Salary = zero

 

The people educated to speak about this are the brokers and advisors. How many clients from brokers on this forum are effected?
Come on honest answers? I mean truly effected though and need to sell because no option on the cliff???????

I’m going to take a gamble and say it’s less than 1% of your client base. And these are investment focused brokers which means their clients are the main ones at risk. Which means for the rest of the population (over 99%) it’s a no issue.

To even suggest that the IO cliff could effect house prices is beyond laughable.

 

I have had prob one client

 

I think @euro73 comments have been insightful

 

That was always my belief.

 

It's really quite simple. You can refinance if you sit within servicing guidelines and DTI ratio's. If you do not, you can not.

Anyone carrying debt that equates to less than 7 x Gross Income( maybe 8 if you get lucky) from salary or rents can probably find a way to get IO refinanced .
Anyone carrying debt that equates to more than 7 ( maybe 8) x gross income from salary and rents is probably going to find it difficult to avoid having to migrate at least some, if not all of their debt to P&I.
Borrower age can influence which side of that line you land on, as well....

Point is, long gone are the days where you could build and then hold large portfolio's that required 15x income or more , using IO lending.

One way to get around the lower debt to income ratio's (for a while anyway) is to use lenders like Liberty , who can provide access to old school servicing calcs at LVR's below 80%. There is no denying you can squeeze more from their servicing calcs than other lenders. But with all the loadings they apply for the privilege of accessing that calculator, you'd want to be able to justify using them.... I would only support /recommend them to borrowers purchasing a cash cow, who can easily pay P&I if required. I wouldnt support or recommend them them for purchasing properties that offer vanilla yields.... 5 years later , when the IO expires you have no exit plan with other lenders and will be stuck with them , paying crippling rates of P&I because chances are that one day you will have to pay P&I.


Here is what they charge



Professional Loading applies for anyone with a total of 3 properties or more, including a PPOR, in case anyone is wondering . So you will be paying an extra 0.75% once you hit 1 x PPOR and 2 x INV properties, if you want to go to extremes to get access to IO lending when others say no. And dont forget the other 0.5% loading for IO. Thats 1.25% loading for anyone with 3 properties or more.


The P&I cliff may have been avoided for now, but don't let anyone fool you into believing that servicing calcs are anything like what they used to be, that IO can be secured every time you need it, and that you can build and hold low yielding portfolios of any real size or value on a wing and an IO prayer. Small loans and small portfolios may be ok, but if you are hoping to own 7,8,9 10 properties or more and carry several million in debt, make sure you can afford P&I.

 

Well firstly, its a P&I cliff not an IO cliff... IO creates waves not cliffs.... and secondly, it already did . You may recall that when IO quotas were introduced early in APRA's intervention, SYD and MEL prices slid. People appear to have very short memories. It took the lowest rates in history and a relaxation by APRA to restore what was lost. Even now, almost all the recovery in prices is being driven by owner occupiers. Investment lending is still soft. So its clear that under certain circumstances prices can be affected when IO isn't readily available and when people have to pay P&I instead. Far from laughable I'd say. So while I agree it hasn't been the problem it may have been... that's only because of the RBA cutting rates to emergency levels.. and they have fired almost all their available arsenal now, so dont kid yourself otherwise.

 

I think you're probably overestimating how many brokers here have clients with portfolios exceeding 6,7,8 properties and exceeding 2 or 3 million dollars and running on 5 or 10 year IO terms.... its not especially common. I'd say 2/3 of my clients are in that sort of situation though and a large % of them have migrated to P&I over the past 2 years or so... but they can afford to as they have portfolio's stacked with cash cows. Whether prices go up, down or sideways, they will pay off their mortgages and retire with the option of living off rental incomes or selling and reinvesting in other assets to generate income. What they wont ever face is the prospect of not being able to manage their repayments. Safe may not be sexy enough for some here , but it sure ain't stupid either !

 

Fair enough. I know I couldn't get excited about something if I had to wait 25 plus years. I'd go insane with that plan. But whatever works for the individual I guess.

 

ditto
I cant see property investors retiring early today unless they trade are active investors

 

I don’t know where 25 years come from.

 

I don’t see many retired today after 30 years of record growth and unlimited access to IO either .

 

My bad, 20 years, probably more for more income.

 

I think one lesson here is that predictions are only made with the information available at the time. With no RBA rate cuts or APRA relaxation good chance the slide that started in 2018 would have continued and maybe accelerated.

But in hindsight we shouldn't be surprised that the regulators took steps to reverse that. A national property crash is in pretty much no-ones interest, so of course there was action taken (rate cuts, guidelines softened).

It's the same with recession, we might be trending that way at the moment but you can be damn sure the government and the RBA wont stand idly by and watch that happen. They both still have options up there sleeve that while not on the table today will pretty quickly be considered after a quarter or two of negative growth.

 

me either. Tbh if I was not allowed to be an active investor in RE, I'd probably invest alot more in stocks.

And i certainly would choose stocks over Resi RE for income.

 

Question is whether having done it once, we can expect the property market to be regulated in years to come whenever the govt feels we've had too much of a run. CG may be more muted in coming years if so.

 

it was never regulated because of growth. It was regulated because IO had become a risk to the system. While the mass migration to P&I has been very well managed, anyone who forgets that rates are pretty much bottomed and all the get of jail cards are pretty much spent , and who decides to get too leveraged up and ignores sound cash flow management, could find themselves back at the cliff at some point down the road. Just be mindful of the P&I repayment gap #mindthegap

 

Of all the brokers that have responded so far then with the exception of @euro73 it’s been a non issue (Rolf’s clients sound like precautionary, not forced selling).

All I can really comment here is that from what I have read in the past 7 years of this forums is that Euro tends to provide different non standard residential products (NRAS, Dual Occ).
That’s not me having a dig it’s more so probably a compliment as you have allowed your clients to grow large portfolios and as I stated from the beginning they are really the only ones I see having any kind of issue

For something to have a felt impact it needs to effect the masses. A few investors with 6 properties that need to sell is not the masses.
I remain uninfluenced in the slightest that the “P&I” cliff will have any impact on property prices.

And @euro73 i think it’s a stretch to say the IO APRA changes were the reason for house prices dropping. I think everyone can agree that was predominately driven by the drop in servicing. The changes I won’t argue didn’t help but they were nothing in comparison to the masses having 20% capacity chopped.