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Interest only property bunnies at greatest risk - 89% think they don't have to pay off capital
Topic Started: 9 Sep 2014, 06:35 PM (8,430 Views)
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Interest only property bunnies at greatest risk: Marcus Padley

Jonathan Chancellor | 8 September 2014

Share market commentator Marcus Padley doesn't invest in property, saying that he feels that he has enough exposure through his home.

He recently wrote in Fairfax Media that a large part of the long-term wealth accumulation in property has always been the forced saving element.

But following his recent research for a debate on housing versus shares at the recent Home Buyer and Investors show, Padley concluded that the culture in Australian investment property is not to save.

He cites recent APRA numbers that show the banks, or authorised deposit-taking institutions, have $413 billion of loans out to the investment property market, of which $369 billion are interest-only.

"That's 89% of people who are so confident that their property price is going to go up that they think they don't have to pay off capital," he wrote.

"Of course, you can't blame them, these days the banks don't want to get paid back, they simply want to lend more, which is why the big number on your loan statement is now a big green number, which is how much you can instantly borrow again.

"But if you don't pay off the capital, as 89% of the property investment market obviously doesn't think you have to, property investors are not building that green number, in which case they are not saving; in which case the thesis behind property investment is simply one of speculation on property prices going up.

"Nothing wrong with that - unless, of course, they don't."

He concludes that without paying off any capital there's no "green buffer" against rising interest rates, falling property values, tenant issues or maintenance costs.

He adds that the whole property and bank industry is doing exactly what the equity market industry does: "Presenting positive long-term returns in hindsight to cover up the specific risks of their asset class, to get investors to buy and give a developer a profit, an agent a commission and a bank an interest rate margin."

"As the front page of the newspapers said this week, 'Investors face interest rate shock'.

"At least 89% of them do.

"Ask anyone who's been an estate agent or a stockbroker for 30 years: there's no free money.

"But the bunnies never stop turning up with stars in their eyes.

"Nothing ever changes."

He cites the latest APRA comments on property exposures of ADIs (authorised deposit-taking institutions) that the high proportion of investment lending was APRA's biggest cause for concern in the current market.

Read more: http://www.propertyobserver.com.au/forward-planning/investment-strategy/property-news-and-insights/35397-interest-only-property-bunnies-at-greatest-risk-marcus-padley.html
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Veritas
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Where are the Bulls today to tell us that this is just part of the cycle?
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?

The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly.
Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
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Investor888
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Sounds like Marcus Padley should stick to shares, as he's clueless about property.
Most people get Interest Only loans BUT with 100% offset accounts linked to the loan. You dont pay into the loan, but into the offset. This keeps investment loans 100% tax deductable if you need to use the offset money
It would be possible for me to have $300k. Use 60k for an 20% deposit on an $240K Interest Only loan with offset , then stick the remaining $240K in the 100% offset account , and hence pay $0 interest - as if the loan wete fully paid off.
Clueless fool Marcus.
Edited by Investor888, 9 Sep 2014, 07:04 PM.
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silverman47
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Veritas
9 Sep 2014, 06:41 PM
Where are the Bulls today to tell us that this is just part of the cycle?
The reason for 10 year interest only periods, is that is the duration of 1 property cycle. Generally speaking property will double every 10 years or so.

over that time rents will rise, and more than cover your mortgage costs + maintenance + insurance + body corp fees and everything else. You will end up with a pay check at the end of the month / week / fortnight which you can use to pay down the mortgage, or get more mortgages... It is completely up to you

Banks know this, this is the majority of their business.
Edited by silverman47, 9 Sep 2014, 06:56 PM.
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Veritas
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Investor888
9 Sep 2014, 06:51 PM
Sounds like Marcus Padley should stick to shares, as he's clueless about property.
Most people get Interest Only loans BUT with 100% offset accounts linked to the loan. You dont pay into the loan, but into the offset. This keeps investment loans 100% tax deductable if you need to use the offset money
It would be possible for me to have $300k. Use 60k for an 80% deposit on an Interest Only loan with offset , then stick the remaining $240K in the 100% offset account , and hence pay $0 interest - as if the loan wete fully paid off.
Clueless fool Marcus.
Got any data on that?

Its possible cavemen wore poka dotted underwear.
silverman47
9 Sep 2014, 06:53 PM
The reason for 10 year interest only periods, is that is the duration of 1 property cycle. Generally speaking property will double every 10 years or so.

over that time rents will rise, and more than cover your mortgage costs + maintenance + insurance + body corp fees and everything else. You will end up with a pay check at the end of the month / week / fortnight which you can use to pay down the mortgage, or get more mortgages... It is completely up to you

Banks know this, this is the majority of their business.
I read the first sentence of your post, then realised that I have read your posts before and it hurt my brain so stopped reading.

Sorry.
Edited by Veritas, 9 Sep 2014, 06:58 PM.
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?

The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly.
Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
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Massive
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Investor888
9 Sep 2014, 06:51 PM
Sounds like Marcus Padley should stick to shares, as he's clueless about property.
Most people get Interest Only loans BUT with 100% offset accounts linked to the loan. You dont pay into the loan, but into the offset. This keeps investment loans 100% tax deductable if you need to use the offset money
It would be possible for me to have $300k. Use 60k for an 80% deposit on an Interest Only loan with offset , then stick the remaining $240K in the 100% offset account , and hence pay $0 interest - as if the loan wete fully paid off.
Clueless fool Marcus.
its not "most people" with IO loans.... its probably about half of them -give or take... according to APRA charts over 60% of new loans are IO and only around 35% of loans have offset accounts...

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Edited by Massive, 9 Sep 2014, 07:01 PM.
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Catweasel
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Investor888
9 Sep 2014, 06:51 PM
Sounds like Marcus Padley should stick to shares, as he's clueless about property.
Most people get Interest Only loans BUT with 100% offset accounts linked to the loan. You dont pay into the loan, but into the offset. This keeps investment loans 100% tax deductable if you need to use the offset money
It would be possible for me to have $300k. Use 60k for an 20% deposit on an $240K Interest Only loan with offset , then stick the remaining $240K in the 100% offset account , and hence pay $0 interest - as if the loan wete fully paid off.
Clueless fool Marcus.
Catweasel say mouse have the steady line of a patter for a Pedley.

Problem the be,

a Pedley would see a predictable response of mouse and its army of white shoes,

who a Pedley understand the well,

and can easily quip:

"what mouse know of a externalities of a steady line of pattern, memes, and socialization"?

And of the course,

mouse have no the idea,

except a clueless fool.
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silverman47
9 Sep 2014, 06:53 PM
The reason for 10 year interest only periods, is that is the duration of 1 property cycle. Generally speaking property will double every 10 years or so.

over that time rents will rise, and more than cover your mortgage costs + maintenance + insurance + body corp fees and everything else. You will end up with a pay check at the end of the month / week / fortnight which you can use to pay down the mortgage, or get more mortgages... It is completely up to you

Banks know this, this is the majority of their business.
Capital gains and rental gains will soon be a thing of the past. But your so focused on history you can't see the future.

Quick buy another two Brisbane units before they complete the thirty thousand in the pipeline.

Look at all the ztupidity tied to this ponzi, one big mess waiting to unfold.

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A Lurker
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Massive
9 Sep 2014, 07:00 PM
its not "most people" with IO loans.... its probably about half of them -give or take... according to APRA charts over 60% of new loans are IO and only around 35% of loans have offset accounts...

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You actually don't need an offset account on your investment property. Just pay IO on the investment property to maximise the interest deductibility and put any surplus cash against your PPOR loan (either in an offset or directly against the loan balance) = 2 loans and 1 (or zero) offset accounts. That is why the number of IO loans will always be higher than the number of offset accounts. Simples.
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Investor888
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Massive
9 Sep 2014, 07:00 PM
its not "most people" with IO loans.... its probably about half of them -give or take... according to APRA charts over 60% of new loans are IO and only around 35% of loans have offset accounts...
So according to this, 35% of loans have offset accounts.

The other feature available on loans without offset account, is redraw facility. So rather than pay Principle + Interest, I again have instead an Interest Only loan, and then put any extra money into the loan, but available via re-draw (and having the money available), and not lock it in by paying principle on loan (and needing to refinance if need the money). Again if I have an 80% interest only loan on a 300K property, then pay the remaining $240K I have into the loan (into the redraw facility), I pay $0 interest, and it's as if I have paid off the loan!!!.

So the combination of
1) Interest Only loan + 100% offset account
2) Interest Only loan + redraw facility
would account for the 89% of people who get interest only loans.

The other 11% are the dumb folk who get Interest + Principle loans, and lock their money into the home loan and then struggle if they have an emergency and need cash quickly.
Don't confuse "Interest Only" as not paying off the loan at all. There are so many loan options available these days, that still "pay off" the loan, but also make the loan payments available when required.
Edited by Investor888, 9 Sep 2014, 07:54 PM.
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