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The P&I v I/O shift is well and truly underway

Discussion in 'Property Finance' started by euro73, 29th Feb, 2016.

  1. euro73

    euro73 Well-Known Member Business Member

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  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Thanks euro interesting reading
     
  3. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    From a practical perspective, we've recently seen several lenders become very reluctant to allow higher LVR interest only loans for owner occupier purposes.
     
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  4. ellejay

    ellejay Well-Known Member

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    Perhaps they don't know what they don't know.
     
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  5. Delfredo

    Delfredo Member

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    Is it still possible to get IO loans for owner occupied? Any lenders still doing it, and if so, under what circumstances?
     
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  6. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    Most are still doing it, the restrictions are around high LVRs. We have been able to find compromises with some lenders though, depending on the circumstances.
     
  7. Delfredo

    Delfredo Member

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    Thanks Peter - when you say that most are still doing it, are they lending out to OO at INV rates? Or are you seeing several lenders doing IO loans to OO at OO rates?

    From what I have heard/been told, for owner occupiers that want IO repayments, they have to pay interest equivalent to investment loans instead of the cheaper owner occupier loans.
     
  8. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    @Delfredo some lenders are charging more for interest only loans even where it's owner occupied, some aren't. Very much depends on the lender.
     
  9. Wukong

    Wukong Well-Known Member

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    @euro73 apprexiate all these articles and your insights.

    for those with a considerable amount of debt, believe it's more prudent to consolidate, pay down debt/ build a buffer and pull out equity for future opportunities.
     
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  10. euro73

    euro73 Well-Known Member Business Member

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    Normally, these data graphs show trends where ;
    Rate reductions = borrowing volume and dollar value increases.
    Rate increases = borrowing volume and dollar value decreases.

    But the graphs are really starting to change now... the trends are changing.


    Take 07-08 for example. SVR's had reached 9.6% just before the 2007 election ( against a cash rate of 7.25%) , and the much higher rates clearly drove down borrowing capacity for both Owner Occupiers and Investors until very late 2008 when the RBA launched a very rapid series of aggressive rate cuts post GFC. 25bpts in September 2008. 100 bpts in October 2008. 75bpts in November 2008 . 100 bpts December 2008. 100 bpts February 2009. 25 bpts April 2009. The result... a cash rate of 3% and a very large upswing in lending , particularly for investors where existing debt could still be assessed using "actuals"

    Then by late 2009 / early 2010 the RBA commenced modest rate rises, but much more slowly than they had reduced them just a year earlier. In October, November and December 2009 we saw 3 x 25 bpts increases, bringing the cash rate to 3.75% and the same again in March, April and May of 2010, and one final 25bpt increase in November 2010. When the cash rate reached 4.75% by late 2010, demand fell away as capacity reduced.

    The cash rate stayed at 4.75% until November 2011, when it was reduced to 4.5%, and to 4.25% in December 2011.

    A further 50 point reduction in May 2012 and a further 25 points in June 2012 reduced the cash rate back to 3.5%, and when a further 25 bpt reduction came along in October and December of 2012, the spark was lit again for another long, strong upswing in lending....

    So far, we can clearly see pretty logical trends, right? Rate increases = slow down in activity. Rate cuts = more activity

    But then something started to change... the 3.5% cash rate resulted in investor lending accelerating, but Owner Occupied lending did not. In fact, it wasnt until mid 2013 and a cash rate of 2.75% that Owner Occupied activity started to pick up - but even then, investor activity was accelerating away. This trend was unlike any other time in the past 30 years. My theory on this relates to the massive advantages "actuals" provided to investors... and even when the cash rate reached 2% in early 2015, owner occupied lending was still falling further and further behind..

    It wasnt until "actuals" were removed in mid/late 2015 that the data shows investor lending volumes fell off a cliff, and owner occupied lending has started bridging the gap.

    For the first time since banking deregulation, we are seeing Owner Occupied borrowing and Interest Only borrowing following completely different trends. Clear evidence that the combination of pricing incentives (P&I is cheaper than I/O) and servicing disincentives (P&I is now, for the first time, treated more "gently" than I/O lending on servicing calculators) is delivering precisely what APRA and ASIC want- a rebalancing of the banks books towards a P&I bias

    But the increased Owner Occupied lending is still a loooooong way off the peak investor lending volumes, so I still believe the pick up in O/Occ will not be sufficient to replace the Investors who have been sidelined...



    Screen Shot 2016-02-29 at 5.43.13 PM.png
     
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  11. Elives

    Elives Well-Known Member

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    would it be possible to give an example of a lender where this applies and how they are calculated etc

    IP P&I vs IP IO

    Cheers,
     
  12. Jason Tyrrell

    Jason Tyrrell Well-Known Member

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    Some lenders will treat 5 year IO as a 25 year loan (even if 30 year loan) on a calculator in terms of servicing - meaning more repayments per month needed to service. Likewise one year IO as a 29 year loan with not so much as a difference.
     
  13. Omnidragon

    Omnidragon Well-Known Member

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    I've just pulled off two 10 year IOs under the new standards, with a big bank too.

    It's great they're tightening the rules. It means people who qualify have enormous buffer and can weather 20-30 interest rate rises as well as probably a 30% crash.
     
  14. euro73

    euro73 Well-Known Member Business Member

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    20-30 rate rises would equate to 5% - 7.5% increases. There wouldn't be many mortgaged households in Australia that could cop that... 1.5% - 2% would put most people under stress would be my guess.
     
  15. euro73

    euro73 Well-Known Member Business Member

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  16. RetireRich101

    RetireRich101 Well-Known Member

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  17. euro73

    euro73 Well-Known Member Business Member

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    CHEAP prices I suspect... when borrowing capacity gets tight - people shop where they can afford.
     
  18. Marty McDonald

    Marty McDonald Mortgage broker

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    High LVR lending has been trending down for ages. I think is more a factor of high prices and punitive LMI costs rather than tighter lending policies by the lender themselves although that has been a factor too. Genworth has just pushed through another round of increases. By my calcs high LVR LMI premiums have doubled in the plus $500K loan sector since pre the GFC.

    Take a below median house circa $800,000 in Sydney as an example. A 97% loan (93% + LMI) and the LMI (if available at all) would be $30,000 or so. This along with stamp duty and costs of $33,000 and you are looking at $63,000 in costs before any equity is contributed to the property. Ouch!

    Dial that down to 95% inclusive of LMI whcih many have as a maximum now and you might as well do a 90% + LMI loan instead as is only another 1% or so you have to come up with and much cheaper LMI premium.

    Then dial down again to 90% inclusive of LMI and you can see why the 88% + LMI is such a sweet spot as doesnt muck up the figures the lenders / LMI providers have to send to APRA??
     
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  19. euro73

    euro73 Well-Known Member Business Member

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    And yet, Genworth's share price is getting hammered. Daily. They must be making record profits with all these enormous premium hikes, mustn't they? ... either that, or the delinquencies and pay outs are far worse than we have been led to believe and no amount of premium hikes can stop the bleeding....
     
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  20. Marty McDonald

    Marty McDonald Mortgage broker

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    They have a somewhat captive customer base so they have 2 levers to increase profits. Volume or Price. I think they know the volume side is against them so they increase price as is all they can do.

    They'd be better innovating new products such as an add on loan above 90% paid back over 5 years or something like that. No capital required by borrower but secured behind the 1st mortgagee. Obviously would only suit those who service very well but there is a stack of those out there struggling to save while also renting.