What happens when the Interest Only period expires on your investment property loan?

It would be good if all the IO loans ended up reverting at different times, but in practice you would have to ask for reduced IO terms for this to happen. Someone refinancing all loans to IO now would want to take the maximum allowable and not reduce the IO period to stagger them reverting to PI>

 

I talked about this cliff over 18 months ago......will be interesting.....

I mitigated my strategy early...most of my loans are 15 years I/O.

Others are 10 years I/O only....

A few are 5 years renewable with out a huge assessment (CBA, SunCorp) ...just renewed 2 loans ofr another 5 years with no hassles....lucky I guess.

 

Renewing I/O terms or refinancing to new I/O terms will come down to borrowing capacity. Your post APRA capacity is a very different number than your pre APRA capacity. By now we all understand this is unlikely to change any time soon.

For some facing this "cliff" , their incomes will be sufficient to allow them to extend or refinance , even with post APRA servicing calcs. But for many - it's going to prove increasingly difficult.

However, even for those who are forced to P&I, there are still circumstances where its survivable without having to sell. The way I see it, even for those investors whose post APRA borrowing capacity rules out I/O extensions or refinances, there will be two distinct levels of impact.

1. Those with more mature portfolio's generating more mature yields will find that even if they are forced onto P&I , they can likely cover it. The maturity of their yields will be their saving grace. This would typically apply where properties have been held a decade or longer, and yields have matured to 8 or 9%. These types of investors can manage 4% P&I or even 5% P&I .

2. Those with less mature portfolio's, yielding 3 or 4 or even 5% , will find the additional repayments of P&I extremely difficult. P&I adds @ 40% to repayments , so 4% P&I will be @ the same as 5.5 - 6% I/O. 5% P&I would be @ the same as 7% I/O.

For those who still have a healthy chunk of P&I PPOR debt, that's a lot of extra money to find...

Now you know why I've been talking about the importance of cash cows and debt reduction for the past few years - especially for those starting out. I believe I called this the decade to deleverage. This is why.

 

Yep...looking forward to picking up some of those NRAS stock for a bargain.

 

You wont find any of mine ...but you'll have no trouble finding some of the stuff I wouldnt touch on realestate.com.au

 

What about Gosnells?

 

What about it?

 

Now it's a parrot.

 

That's good to know, had the loans finished the IO period already? I've got a couple that finish IO early next year but I'm hoping I can extend them now.

 

A parrot...I thought it was a duck....I could be wrong......

 

Both were expiring within the next 3 months.

 

What rate do you 'stress test' your portfolio at? I've just done it at 7% IO and also 6%PI (which I assume is similar to 8.4% IO)....And do you look at the before tax or after tax figure? -$1500p/w starts to look a little scary

 

I stress tested @ 6.5% I/O and it already doesn't look good. Although I haven't factored in factors such as CPI salary increases and rent rises that should happen during the time it takes the rate to reach this figure.
In saying that, rents are highly unlikely to increase in line with interest and unless changing jobs/promotion CPI (2-3%) will probably not offset the damage.
Therefore the result is still worrisome

NB: I always calculate pre tax.

 

It? You're all class.

 

Anyway, back on topic... What happens when the Interest Only period expires on your investment property loan?

Well, you were warned, so you built up a good cash buffer for when this happened. Now your loan has gone P&I you use some of the cash buffer to offset or pay down the loan. The loan now takes care of itself. No issues as far as I can see.

 

Its not just about the cash buffer. Its about the tax side

Example
$500,000 investment loan at 4.5%pa
The monthly loan repayments:
$1,875 as IO
$2,779 as PI over 25 years.

That is a $904 per month difference.

That means an investor will have $904 less money each month to pay down non-deductible debt.

 

Thanks @Terry_w. I didn't think about non-deductible debt because I haven't had any since 2012. In that case I would put the funds in an offset account against the non-deductible debt and pay the $904 per month difference from the offset account.

They can still use debt recycling.

Incidentally, if the principal required is $904 per month, subject to borrowing capacity, could an investor set up a line of credit against the PPoR and pay the principal ($904 per month) from LOC and then declare the interest as a tax deduction against the IP loan? A $100,000 LOC being drawn down by $904 per month would last for 110 months, or 9 years. The issue is whether ATO would disallow the deduction of interest against the IP loan.

 

If you're having trouble extending the I/O period I think you would also have trouble getting an additional LOC.

 

The ATO wouldn't disallow the deductions of interest on the main IP loan, but they might on the LOC.

But if someone had a $100k LOC getting rid of this may be enough to allow them to qualify for extending the IO period - or maybe not.

See this thread where I had a similar idea:
Tax Tip 46: Want to Pay IO on a PI loan? https://propertychat.com.au/community/threads/tax-tip-46-want-to-pay-io-on-a-pi-loan.4438/

 

So, lets say you have a 260K loan IO at 3.85%, interest would be $850/month. If the loan was PI then P&I repayments per month would be $1219. So, if you had an attached offset with 260k in it and the IO period finished, then I would assume you P&I repayment would be $369 (ie 1219-850)? ie you principle would be reducing each month and thats about the only impact?

Also, my IO loans with AMP revert to P&I in approx 2.5 years - does anyone know what their current policy is on extend IO?