Westpac max 80% LVR for new investment loans as of 8th July

Hi guys - I wanted to ask a question re P+I vs IO for a buy and hold strategy

I understand IO repayments are less than PI hence increases cash flow but....

wouldn't P + I be a better option as the loan amortizes over time and hence the repayments become smaller (all things remain equal)

With IO, you would be looking to sell sometime in the future to repay the principal wouldn't you?

Surely you can't keep on rolling over the IO term indefinitely until you have a lump sum principal repayment at the end of the loan term?

Appreciate your thoughts on this matter.

 

You can and I do keep rolling over indefinitely. In fact I try and increase it whenever I can to purchase more property.
I could spend my hard earned paying back a loan, or I could spend that same money 'holding' another property.
I'm not worried about reaching the 'end' of my loan term, and having a lump sum to pay, I simply refinance the loan prior to the end of the loan term.

 

No big surprises as more and more lenders move to 80% max lvrs for investors. Will be interesting to observe what, if any, fallout occurs over the coming 12 months.

 

ahhh ok thank you - I get ya! maybe its because I work for a bank that I hate owing anything to them!

with your strategy you will need to repay the principal back "eventually" though right? Why not just have redraw on the loan to use it like a big credit card...?

 

Because any spare money I have goes into finding other investments, or feeding my family etc. I do keep some money in offset, but I don't have a plan to repay the debt. Just hold the property until the rental return outweighs the repayment. Which bank do you work for and what do you do there?

 

Because it creates massive tax issues! If you want to do that use IO with an offset account. The payments will be exactly the same as if you were paying P&I but it keeps the loan clean.

 

Not picking on you tobe, but this is what's created the current problem in my opinion.

 

To a degree, but I don't think Tobe's example above is indicative of "the average joe".

It makes sense that on an investment forum such as PC that it would be quite a common shared attitude to suck out as much equity as soon as possible to reinvest in more assets.

I don't think that the general population have this much comfort with accruing debt as fast.

Another point...

If restricting investment lending across the board ramps up even more, then this is only going to see upward pressure on rents in my opinion.

Wait a couple years until we see ACA headlines....

"100 people at open for inspections, 2 bedroom unit in xxx has 50 applications and a bidding war to secure a lease"

Speculation by me, but if the credit tap gets turned off for investors and OZ continues with strong population growth, people need a roof over thier heads, regardless of finance availability or not.....rental BOOM time

 

Taps are not being turned off just the pressure reduced a little.

 

I think "the average joe" going into debt with no intention of ever paying off an IP is what has cast the NG debate into the light. The issues are linked.
Getting an IO loan where the interest payments are a lot more than the rent coming in - which without the benefits of NG they wouldn't be able to afford - hoping/speculating? (We're talking average joe) that the value will increase.
The regulators get nervous. Banks make changes. It's like a catch-22 - we are our own worst enemy.

 

No offence taken, but your blaming the messenger. Negative gearing and cgt policies are the reasons we have our current problem, not how 'economic man' reacts to these policies.

 

thanks tobes and Jess

re tobes - work for the big red W as a hybrid lender - yknow one of those new age commercial/residential types

 

Tough gig. Gives you a good overview for when you switch to the dark side.

 

80% LVR reduction might be enough to effectively turn the tap off, actually, for a big chunk of the mum and dad investor populace. The banks might still offer 80% lends but if two thirds of the investment-hungry populace need 85-95% lends, the tap is effectively turned off for them.

 

With the majority of local investors purchasing existing stock they dont really contribute to housing supply so I dont think it would have too much an affect on rent.

People in positions with lower LVRs will be able to take advantage while the higher leveraged folks have to sit out for awhile.

Developers will keep flogging OTP investments overseas which will add to the supply and keep rents in check.

Reduced competition from investors on existing stock may allow more people to take advantage of low interest rates and get on the property ladder.

 

I think many people make this error in thinking that an investor buying an existing property doesn't add to rental supply.... when it actually can and does.

For instance I bought a property from an owner occupier who was moving into a new house that had just been constructed, which was an upgrade for them.

I bought the house they moved out of and it became an IP for me, so I effectively added 1 new dwelling to the rental pool in doing so.

A restriction on investors purchasing will definitely impact rents.

 

Still not really the case though is it. The extra supply was created by the person purchasing a new build not from the house changing from home to IP.

Whether an existing house is bought by an investor or home owner is irrelevant to the overall supply of housing stock.

 

But it isn't irrelevant to the "rental pool".

Less rentals available = increasing rents assuming a growing population.