Just commenting; Rather than specifically criticising per se - But in my formative years, a lesson that was VERY thoroughly drummed into my head by my parents (children of the Great Depression ) was that once you got your home bought and paid for, you didn't put it in hock to any damn bank. My, how the world has changed ...
I'm not getting confused 888 but for purpose of this conversation i dont see point of the distinction relative to the point that was simply there are more io mortgages than offset motgages and that tthose mortgages without an offset are unlikely to have any hidden capital behind them without being transferred from other mortgages
Just commenting; Rather than specifically criticising per se - But in my formative years, a lesson that was VERY thoroughly drummed into my head by my parents (children of the Great Depression ) was that once you got your home bought and paid for, you didn't put it in hock to any damn bank. My, how the world has changed ...
Yep the only good thing about the good old days is that they are thankfully in the past.
I'm not getting confused 888 but for purpose of this conversation i dont see point of the distinction relative to the point that was simply there are more io mortgages than offset motgages and that tthose mortgages without an offset are unlikely to have any hidden capital behind them without being transferred from other mortgages
Why the need to transfer from other mortgages??? You still don't seem to understand an IO loan with redraw facility.
The IO mortgages without offset accounts, still HAVE redraw facilities on the loan. So someone making the exact same payment amount as another person with an principle + interest loan, IS still paying off the home loan at the same rate!!!. Absolutely no difference between the two except for the fact that the IO guys has the additional payments available.
Read up on offset and redraw. They are two COMPLETELY different things. You are confused.
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?
Yes. I have come to the same conclusion. Used intelligently, an IO loan is lower risk to the borrower because it gives greater financial flexibility. But I think prudential standards would say it is higher risk to the bank - always assuming the same LVR and security and term, of course, which is a huge assumption to make.
Massive
9 Sep 2014, 09:50 PM
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
Definitely higher risk to the lender because they don't amortise and hence are more vulnerable to a drop in equity.
It's like giving the borrower another credit card. If they are intelligent and put it in the top drawer for a rainy day, it actually gives them a buffer. If they are fools it can get them into trouble.
I have two properties both with $300,000 mortgages.
1. Is interest only and been interest only for 7 years ( rental house ) 2. The other was $370,000 paid down to $300,000 over 4 years ( house I live in )
The reason I keep the rental interest only is because the money I save I keep it in the offset acc of the house I live in so I pay the house I live in off quicker. The reason nearly everyone with a rental does this is because you can claim the rental on tax, you can't with the house you live in
Why the need to transfer from other mortgages??? You still don't seem to understand an IO loan with redraw facility.
The IO mortgages without offset accounts, still HAVE redraw facilities on the loan. So someone making the exact same payment amount as another person with an principle + interest loan, IS still paying off the home loan at the same rate!!!. Absolutely no difference between the two except for the fact that the IO guys has the additional payments available.
Read up on offset and redraw. They are two COMPLETELY different things. You are confused.
I'm talking of tits up/ risk scenario relative to what was mentioned in op ...
Those loans ( say half of io ) that don't have capital behind them to support the loan if the owner has repayment issues such as no job or no rent ... They don't have money sitting in an offset account to pay interest while looking for new revenue and are at risk of default ...
If they had free capital in another mortgage to transfer to help with interests they could .. But they will be pulling capital from that asset which i would imagine doesn't help too much .... But probably a little
Whole point was trying to determine how many io loans are really floating out there with no offset / and true exposure of io loans etc rather than the 89% mentioned in op ...as I don't buy the whole " most people have offset accounts " either
But call me stupid again if it makes u feel better
Those loans ( say half of io ) that don't have capital behind them to support the loan if the owner has repayment issues such as no job or no rent ... They don't have money sitting in an offset account to pay interest while looking for new revenue and are at risk of default ...
So how is that different from someone with a principle + interest loan (with no offset - ie, traditional loan).
That person if they loose their job, has no money to pay the next months principle + interest loan repayment either, and when they skip payments, they are also at risk of default.... At least the person with the interest only loan (who has been paying the same amount back - as the interest + principle guys), has a pool of money in redraw to call on (redraw), and pay the next few months of loans repayments.
On an interest + principle loan, you can't just take the principle amount out (you need to refinance).
Clearly you have NO home loans yourself. If you did, you would have some clue of what you are talking about.
Massive
9 Sep 2014, 10:55 PM
Whole point was trying to determine how many io loans are really floating out there with no offset / and true exposure of io loans etc rather than the 89% mentioned in op ...as I don't buy the whole " most people have offset accounts " either
But call me stupid again if it makes u feel better
A lot of loans don't have offset accounts, but MOST loans on offer these days have redraw facilities (on interest + principle, OR interest only loans). You still seem to not understand the difference between offset accounts, and redraw facilities on a home loan.
Anyway, you can pay you interest + principle. I'll get interest only, and put the same amount into the home loan each month as you do, and have the additional payment above interest (your principle portion!!), available on call in the loan via redraw.
See, if over say 10yrs, we have both payed off $150K from a $400K loan, YOU have got to the bank and beg to refinance to access the extra you have payed in principle (for another property purchase). I can just pull the amount available in redraw $150K (the amount you have locked in principle), overnight and buy a property the next day.
You comments just show you have no clue on loan structure.
So how is that different from someone with a principle + interest loan (with no offset - ie, traditional loan).
That person if they loose their job, has no money to pay the next months principle + interest loan repayment either, and when they skip payments, they are also at risk of default.... At least the person with the interest only loan (who has been paying the same amount back - as the interest + principle guys), has a pool of money in redraw to call on (redraw), and pay the next few months of loans repayments.
On an interest + principle loan, you can't just take the principle amount out (you need to refinance).
Clearly you have NO home loans yourself. If you did, you would have some clue of what you are talking about. A lot of loans don't have offset accounts, but MOST loans on offer these days have redraw facilities (on interest + principle, OR interest only loans). You still seem to not understand the difference between offset accounts, and redraw facilities on a home loan.
Anyway, you can pay you interest + principle. I'll get interest only, and put the same amount into the home loan each month as you do, and have the additional payment above interest (your principle portion!!), available on call in the loan via redraw.
See, if over say 10yrs, we have both payed off $150K from a $400K loan, YOU have got to the bank and beg to refinance to access the extra you have payed in principle (for another property purchase). I can just pull the amount available in redraw $150K (the amount you have locked in principle), overnight and buy a property the next day.
You comments just show you have no clue on loan structure.
What makes you think more investors are choosing loans with a redraw facility compared to an offset facility. Surely from a tax deduction point of view you'll be better off having an off set account to park your spare cash than just repay into an IO loan and then redraw and loose the tax deductible status.
Therefore an IO only loan without an offset facility to me says there's either no spare cash or the spare cash is parked somewhere else not necessarily in the IO loan with redraw.
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