those IO IP's with no offset accounts are essentially IO loans with no offset accounts - and no additional capital hidden in a corner to be dumped on them unless the owner transferred capital from their PPOR ....
Not true. It does not have to be an offset only. It can be a redraw facility on the loan. Someone can pay the same repayment amount into the home loan as someone with an interest + principle loan, but then have the otherwise principle portion in the redraw facility (on an interest only loan), rather than locked into the home loan. So there IS additional capital hiding in the corner (in the loan as an available redraw amount)!!!
Redraw With the redraw feature, you can re-draw cash back out of this home loan- this allows you to access funds that you have already paid into the loan so that you can draw these back out. When you redraw, you can only redraw additional amounts that you have paid into the loan above the standard monthly amounts.
Massive
9 Sep 2014, 09:06 PM
just weeding out the implication that "most" IP's with IO loan have an offset account that is loaded with cash that is not showing up in the statistics, or implying that large proportion of offset accounts are generating 0 interest as they have a fully stocked redraw facility ... i have no doubt there are examples of this, but id bet its not a majority, particularly in new loans ..
Not saying that people necessarily have large portions in offset, just that people use both offset facilities, and redraw facilities (when offset exists or not) from interest only loans. So to freak out that 89% of new loans are interest only is stupid. These people don't understand home loans. Why would I dump money into a savings account earning 4.00% interest, and then pay tax on the interest as well, when people can dump the money in offset or loan (available via redraw) earning the interest of the home loan effectively (5.00%, etc).
Not true. It does not have to be an offset only. It can be a redraw facility on the loan. Someone can pay the same repayment amount into the home loan as someone with an interest + principle loan, but then have the otherwise principle portion in the redraw facility (on an interest only loan), rather than locked into the home loan. So there IS additional capital hiding in the corner (in the loan as an available redraw amount)!!!
Redraw With the redraw feature, you can re-draw cash back out of this home loan- this allows you to access funds that you have already paid into the loan so that you can draw these back out. When you redraw, you can only redraw additional amounts that you have paid into the loan above the standard monthly amounts.
exactly redrawn from their PPOR... (or whatever loan it is that has the offset account... ) you even quoted me saying as much ...
Quote:
and no additional capital hidden in a corner to be dumped on them unless the owner transferred capital from their PPOR
So to freak out that 89% of new loans are interest only is stupid. These people don't understand home loans.
but if only 35% of loans have offset accounts as stats show - then more than half of those 89% of loans are hanging out there currently as purely interest only loans with no additional capital behind the principal value of the property. I
sure, can pull the capital from redraw on the other properties, but then the other properties are still going to need to be repaid with the same amount of capital and its still quite a number of properties sitting there on hopes of continued capital gains and low interest rates.
Bardon
9 Sep 2014, 09:18 PM
So can anyone explain to me what actually is wrong with an IO loan?
risk and exposure...
right now there's no problem... think the argument is in OP if rates were to rise, or there was an employment shock, increase in rental vacancies etc - these are the loans most at risk of defaulting.
right now there's no problem... think the argument is in OP if rates were to rise, or there was an employment shock, increase in rental vacancies etc - these are the loans most at risk of defaulting.
Its a bit esoteric but I would argue that an IO loan is lower risk as the borrower has higher cash flow to deal with any unexpected changes and will therefore have more available funds and higher savings than a P&I borrower over time. Rates rising, rental vacancies, employment shock are therefore a higher risk to the more stressed theoretical P&I borrower?
exactly redrawn from their PPOR... (or whatever loan it is that has the offset account... ) you even quoted me saying as much ...
but if only 35% of loans have offset accounts as stats show - then more than half of those 89% of loans are hanging out there currently as purely interest only loans with no additional capital behind the principal value of the property. I
You have no clue what you are talking about Massive. Offset accounts and redraw facility are two SEPERATE THINGS!!!!!
Redraw from a IP even with Interest Only loan. Every bank offers interest only loans with redraw facility (on that IP loan).
Do some research. You sound like a fool.
For example Westpac Rocket Repay Home Loan has great flexible features. Interest only for up to 15yrs, and then ability to dump extra funds INTO the loan as well, but have it available for redraw (not locked in by principle repayments). Interest only option available Pay interest only for up to 15 years and keep your repayments to a minimum A handy redraw facility Set up a redraw facility to redraw excess funds from your loan at no extra cost
Its a bit esoteric but I would argue that an IO loan is lower risk as the borrower has higher cash flow to deal with any unexpected changes and will therefore have more available funds and higher savings than a P&I borrower over time. Rates rising, rental vacancies, employment shock are therefore a higher risk to the more stressed theoretical P&I borrower?
My guess is the assumption is: the IO loan has never paid off any principle - comes into downturn/higher rates = paying off interest on full value of loan with nothing the P&I loan has been paying down the principle at low interest rates and when comes to downturn can switch to IO if required but will be less
of course as you guys have said, its naive to assume all IO loans are in this boat as this does not apply to many who are saving their principal/ capital in their offset accounts and there are probably indeed some IO loans with full redraw facility / offset account balance sitting there until end of mortgage term...
but you are indeed correct ...
Investor888
9 Sep 2014, 09:31 PM
You have no clue what you are talking about Massive. Offset accounts and redraw facility are two SEPERATE THINGS!!!!!
NO. Redraw from a IP even with Interest Only loan. Every bank offers interest only loans with redraw facility (on that loan).
Do some research. You sound like a fool.
For example Westpac Rocket Repay Home Loan has great flexible features Interest only option available Pay interest only for up to 15 years and keep your repayments to a minimum A handy redraw facility Set up a redraw facility to redraw excess funds from your loan at no extra cost
They are both relying on capital from the home / mortgage, no ?? whether you redraw from property A mortgage to use on property B or you pull the money from property A's offset account to put into property B.
if an IO loan is setting there, with no offset account, there is no secret stash of capital sitting there ...
its simply an IO loan.... with its owner likely relying on benefitting from low interest rates , solid capital gains, decent rental income or a combination of the 3...
Not trying to be right or wrong here, just saying that an IO loan can certainly be viewed as lower risk from the borrowers perspective, as you have given less of your funds to the lender and you are committed to lower loan payments to the lender in today's money than a P&I borrower is, all things being equal.
Not trying to be right or wrong here, just saying that IO can certainly be viewed as lower risk from the borrowers perspective, you still have given less of your funds to the lender and you are committed to lower loan payments in today's money than a P&I borrower, all things being equal.
Depends - if you take out a loan at low rates, and sit paying interest only while rates say go from 5% to 9% 10 years later its going to be much more costly to manage than the person who paid down the principal in that time...
the P&I has more wiggle room to make interest payments as they can switch to an IO in tough times on a lower mortgage value ... The IO loan is stuck at purchase price with no more wiggle room.. ...
Edit ... Don't get me wrong .. Ive grown to like the idea of io loans in right scenario ... But i do believe it had potential to be more risky if not managed correctly
if an IO loan is setting there, with no offset account, there is no secret stash of capital sitting there ...
its simply an IO loan.... with its owner likely relying on benefitting from low interest rates , solid capital gains, decent rental income or a combination of the 3...
My guess is the assumption is: the IO loan has never paid off any principle - comes into downturn/higher rates = paying off interest on full value of loan with nothing the P&I loan has been paying down the principle at low interest rates and when comes to downturn can switch to IO if required but will be less
You still have no understanding of loan structure.
Interest only loan + offset is (1 loan + 1 seperate bank account linked to the home loan) fully offsetting the interest. Interest only loan + redraw is (1 loan (same as principle + interest loan), but instead of the additional money going into the principle, it still goes INTO the loan, but is available for redraw - part of THE LOAN).
Your getting confused between offset account and redraw.
For the idiots like you. Assume Home loan $400K say $1800/mth interest (5%) ($600/mth principle) total monthly payment $2400/yr 1yr - $1800*12 = $21600 interest and $7200 principle.
Same amount repayed $2400/mth to the two scenarios 1) Interest + Principle loan after 1 year $400K original - $7200 principle repayment = $392800 loan amount ($0 available for redraw!!!). Everything is locked into principle. 2) Interest only loan (with redraw facilility on loan) after 1 year $400K original - $7200 extra repayment) = $392800 loan amount ($7200 available for redraw!!!)
Same loan amount remaining of $392800 after 1yr in BOTH cases. Just the guy with the Interest Only loan has $7200 available in cash on-call, while the dumb interest + principle loan person is stuffed with $0 in an emergency.
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