The IO property cliff disaster? Fact or fiction

Not in my experience.

Any savings due to rate cuts AND the lower assessment rates that came through last year were quickly absorbed by increases to HEMs which made the effect on borrowing capacity pretty much nil for my clients.

The rate cuts on their own made zero difference to borrowing capacity - the floor was 7.25%. Made it worse, actually, as there was less negative gearing benefit in the calcs.

 

It will as a lot of banks will ask for an exit strategy. But that is easy as telling them you will sell down your IPs in 10 years.

 

Not speaking for anyone else, just personally, there were some good deals around at the time and I voluntarily switched all my loans to P&I. The repayments are higher for sure. The impact for me is that I am not increasing my offset balance as fast as I used to. #firstworldproblems

 

I would have to disagree.

The rate cuts in June 2019, July 2019 and October 2019 coincided precisely with the commencement of recoveries in SYD and MEL because they coincided precisely with the removal of the 7.25% assessment rate, and the introduction of a 2.5% floating assessment rate .

Prior to that, if you are talking about the impact of rate cuts during the period the 7.25% assessment rate was in place, well... there hadn't been a rate cut since May 2016, which was just after most lenders adopted the 7.25% assessment rate you refer to .... the one before that was May 2015, prior to the APRA changes... so there was only 1 x 25 bpts reduction for the entire time the 7.25% assessment rate was in operation.

And I would add that lenders didnt pass it on to investors anyway. In fact, they increased IO rates even following the RBA reduction, in order to force a migration to P&I, because there was a hard quota in place - which is how the P&I cliff came into existence in the first place. PC members may recall that IO pricing was decoupled from O/Occ pricing at the time by almost 100bpts.

So its just not accurate to suggest that there were rate cuts that had a negative effect on neg gearing ... IO rates went up not down during the 7.25% assessment rate era

But there was a total of 75bpts in cuts within 4 months of it's removal.... and that certainly improved borrowing capacity and provided a cushion - which was my point

https://www.rba.gov.au/statistics/cash-rate/

 

So we can all agree nothing to see here, let’s move on to the bigger problem. Affordability again given the market has been given an absolute rocket up it’s bum.

 

No problem at all, it was an early Xmas present for me back in November.

Actively being involved in the markets is really quite an exciting journey. Those sitting on the sidelines are missing out on all the fun. And dollars.

 

parts of some markets have , yes .

 

Yep. There was no cliff and no rear guard arguing will change that. Or maybe there was a cliff but most of us had very good parachutes.

 

There was a cliff and still is ....

In reality we were facing it . Would have been able to keep on going , but would have been painful .

We sold two properties that were quite cash flow negative . We've just sold a Hobart property ( for a significant profit ) and that has enabled us to pay down some debt and finance a new development which is just about to start ( hopefully ) .We've also got to the point where we can refinance to further IO periods and are just finalising that on some properties .

We also built a granny flat .

We are letting some properties go to P& I . One has done so

Cliff

 

There is definitely a cliff.....but some will sit there like Frog in boling water till it is too late.

Of the 27 loans I have.....only 3 are P&I...another one goes P&I in May...and then another 2 next year. After that I have till 2025 before more go P&I. I am lucky (well could be unlucky if I don't manage it)....as most were taken out with 10 and 15 years interest only.

I am planning to extinguish some of my P&I loans as well as with sell downs have this enacted before the P&I cliff hits. I hope to have less than $1m in debt by 2026. Mostly via sell downs.

 

You are the definition of smartly risk manage all those balls of 27 loans in the air like a circus act clown juggling the balls in the air.
Just don't slip up or fall crook and it would all come down like a house of cards. Punt!

 

The wiggle and a few of his mates wouldn't stop harping on about it and were standing on the edge of the cliff waiting to pick up properties for half price.
The savvy kept going about there business and walked around the cliff

 

so we come full circle to... the P&I cliff was not a myth. For some it caught them out enough to require sales. For others it caused stress to their cash flow but they only needed to migrate some loans across to P&I... and for others- depending on the timing of when their IO debt expired, the rate cuts and floating assessment rate allowed for a cushion and the avoidance of any real problems....

Arguing it didn't happen, isn't still a consideration for some and wont be a consideration for some in future is silly.

An issue avoided is not the same as an issue that didn't occur

 

What should a cliff that turned out to be lower than expected be called?

 

Well....risk management back-up ....carry a couple million in offets against where you loans are paid.

So loan position covered for 10 years plus. Dems how youse roll.... you can fall sick...but that is why you sell down early.

 

TBH - I don't think anyone is in denial for a minute that the cliff is real or not.
It is just see how you can manage it or juggle it like a circus clown with balls in the air act.

Personally I was shocked when I switched over. It just made my cash flow small now compare to before.
But it is now put towards paying down the principles. Which is the same thing and lower interest rates for the privilege. Does it mean my property accumulation journey slows down? Yes but it is not the end of the world. Just a small headwind as I don't buy regional area. Which means I won't be stuck when the market change. Not depending on the government incentives or schemes to get ahead. You make your own luck!

 

A speed bump , maybe... although it was still truly a cliff for some. Timing would have been everything in determining whether you got caught short or not ... For example- if you were trying to refinance lots of IO debt in that 2017/18 period when quotas were in full force and credit was really at its most challenging for investors, that's one thing. For a 6 -12 month period they were declining lots of deals that passed servicing, just to meet the quota. But it was less challenging to refinance after the quotas were met and then lifted . And we know it's easier now in 19/20 since floor rates dropped @ 1-1.5% give or take. The big question is, has the P&I cliff been avoided completely or just deferred 5-10 years for some?

 

I think you should read the thread again

 

I should have worded the title a little clearer. My bad. What I meant was an IO cliff which would be a disaster for the property markets, not so much for individual investors. There are tons of people who buy in areas which won't do well. Yet their poor decisions and subsequent financial issues won't massively affect markets for all.

It seems clear to me that the IO cliff issue was only a red flag for individual investors. And not a black swan event to kill Resi markets in general.

Still yet to see 40% plus corrections as some were convinced about. Some of them also have disappeared from PC once the Syd/Melb booms took place.

They liked it all together. APRA, fancy income to loan graphs, China got thrown in too, poor immigration rah rah rah. And recession is around the corner.

Common. Let's face it. The whole doom and gloom thing was waaaaaaaaaay over exaggerated. The savvy investors just got on with it while the herd were running around like headless chooks. Same story every single time. The fear takes over while common sense takes a far back seat.

 

I agree. Very early on I predicted that there would be a modest correction, no crash, and that the RBA would likely be required to provide a cushion to allow the P&I migration to take place without causing mass delinquencies... but I think its also important to have debate about these things and work through all the possible scenarios. It was a very unusual set of circumstances and no one had ever seen it before. Still today, the fragility of a system remains in so far as prices remain very reliant on credit availability, and the lessons of how important sound management of credit/debt is, shouldn't be forgotten just because record low rates have applied a bit of a band aid to things.... the underlying issues of debt fragility are still there - if we were to face a serious issue that required economic stimulus, the RBA's cupboard is almost bare now.... Lets all hope that never happens.