The IO property cliff disaster? Fact or fiction

In general it's impossible to decipher actual individual adjustments in market conditions in isolation and its impacts. There were a whole range of factors. IMO rate cuts had the biggest impact by a distance (it drives affordability and shifts incentives).

Unpacking it a little further:

• Sydney and Melbourne markets in H22019 are being driven by OO's.
• In general, the market has been two paced - boosted by very substantial growth in the $1mill+ markets - i.e. the more premium areas have done really well to date, and western suburbs (cheaper) not so much. The net 10% or so change is largely a 15%+ change in these areas, and a smaller increase in the cheaper areas.

• This segment is the one that had a massive boost in lending, even with HEM recent changes. There's plenty of $1mill plus mortgages in these inner south, inner west, east, inner north markets that have been going gangbusters. For mortgages this size, the net surplus impact equivalent of these assessment rate changes is roughly $1k per month. This amount is significantly larger than HEM adjustments over the course of the last 12 months, and if mortgage sizes are large enough, many borrower segments have access to an ALL TIME EVER high in borrowing power.
• Given the lending changes really benefits OO who have larger loan sizes - this market being the one that's booming makes logical sense. They've been the greatest beneficiaries in the country from the changes that took place to monetary conditions.

In saying that, I do agree that the investor market has had a much smaller increase in borrowing power as you've noted, largely because of HEM adjustments and stripping out INV property expenses from HEMs altogether and adding them in separately (with some, or just further rental shadings with others).

The investor market so far isn't really what has driven Sydney & Melbourne into a mini-frenzy though.

 

@Jess Peletier is spot on.
The election was the turning point. It totally shifted sentiment. The market turned as soon as it ended.

I guarantee with that in isolation alone we would have started to see a slow increase in the market. Nowhere near what it’s doing now or will do but I still maintain it was the biggest factor.

Flip the election result and still drop rates and assessment and I’m still confident the uncertainty we would still be seeing a very flat market.

 

My guess/hope is that from September, APRA will direct banks to allow anyone wanting a one year IO to get it, along with a one year/corresponding increase in the loan term.

 

I think you will find that unless you can service this it wont happen

 

And if you can’t? Be forced to Sell in a free falling market?
It’s a no brainer to allow anyone who needs it a 1 year IO extension.

 

Crazy I know

NAB wont do it unless you can service debt, I presume others doing the same??

 

They probably just have not been given clear instruction yet as the legislators are waiting to see what happens in the next few months.
It won’t be the banks not wanting to do it....I mean the options are force customers to sell and lose years of interest or maybe even get someone to sell in hardship and not recoup your costs.....OR get an extra 1 years interest and probably some nice loyalty points.

 

Seems a logical strategy. Hypothetically how long can lenders sustain IO payments for, lets say a worst case scenario and no vaccine is found in next 3 years, which is actually possible.

 

I had long negotiations with Melb NAB that ended late November last year to try to get an extension on IO on one loan that had been IO for 5 years and due to expire. They were fairly negative to allowing it so I begged for 1 year IO after months of negotiations. Got a last minute “no”. They wanted me to sell a property in a rising market rather than extend IO. (Obviously before COVID). Bris and Perth properties in portfolio. It’s only because of Covid and events in early 2020 being cancelled that we finally have our head above water and the P & I has been easy plus savings. Interest rate drops have helped too. They were quite ruthless as my expenses were about to decrease but wouldn’t take into consideration. They Wanted me to sign a stat-dec to say if I sold a property in a years time I’d pay down debt which I wasn’t prepared to do.

 

I’m not sure I understand the question?
You mean can the banks afford it? If so then Ofcourse they can. They are still profiting from the loan versus the alternative of the customer selling the property and discharging the loan.
For every year of IO where they are allowed to extend the loan term they are also making more money so I don’t think they will care for that.

If people are given an extra 1-2 years on IO it will also prevent a lot of forced sales. This as well only benefits the lenders from keeping LVRs intact.

In a nutshell there is really zero benefit in regulators not allowing IO extensions to customers who need it.

 

This has already come into play for some lenders, some criteria applies....

 

Cough cough had a few too many reds under the belt last night. Go LFC..
I was thinking along the lines of smaller non bank lenders running into trouble if the economy continues down this path like some did during the gfc.

 

Smaller lenders failed during the GFC because of liquidity issues. Central banks have addressed this early this time round. The evidence? No significant increases in interest rates by second-tier lenders. No high interest term deposits being offered.

 

I didn't think any of the majors were allowing the loan term to be extended if you choose the IO option?

However, I do know CBA are increasing the term if you pause your repayments - no one else though

 

Good to know the smaller lenders will be fine in these tough times.

 

Only 1 year IO extension... CBA as an example below.. you can literally do it in netbank with a few clicks:

Temporary one-year Interest Only (IO) & Interest In Advance (IIA) to support customers due to the broader impacts of Coronavirus.

We are temporarily allowing existing customers to apply for a one-year IO and IIA switch/ extension without requiring a serviceability assessment, when:
►They are not in arrears
►They are not in financial hardship
►They are not participating in the Home Loan six-month repayments deferral
►There will be a minimum of 1 year remaining on the contracted loan term at the expiry of the proposed IO term
►The loan account has been funded for a minimum of 180 days

 

Still best to refinance (if servicing allows) than get io extension. The interest rates offered right now for new customers is fantastic.

 

Why are they allowing a switch on these conditions, which if true, mean there’s no problem?

Looks like Banks are using the pandemic to kick the IO can down the road. They know right now is not the time to sell and the Principal is at risk. They will take this opportunity to sort it out over the next year , hoping things improve.