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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 (8,437 Views)
Stan
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miw
9 Sep 2014, 10:42 PM
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.


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.
That's actually a very good analogy.

Unfortunately there's no way of knowing how many people are maxing themselves out. Assuming prices continue to rise the banks won't have a problem though.
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Investor888
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today
9 Sep 2014, 11:42 PM
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.
You can have a loan with a redraw facility, and with/or without an offset account. They are NOT mutually exclusive.
Our last home loan - ING Direct has offset account, and redraw facility. We put extra money in the offset account to not affect the tax deductibility of the loan itself. The point was to Massive that Interest Only (even on a Primary Residence) does not mean you are not paying the loan off. It just means you are not forced to pay the principle each month, but can may the same extra repayments (as principle), and have it on-call via redraw facility on loan).

Most investors would now choose to also have an offset account linked, but for those without offset account, MOST loans these days have the redraw facility as part of a loan (for both interest only, or interest + principle).

RateCity Loan Compare - Not all loan providers
53 investment loans, of which 35 automatically have redraw facility. 21 have both redraw faciliity and offset account functionality.
96 owner occupier loans, of which 56 automatically have redraw facility. 35 have both redraw faciliity and offset account functionality.
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John Frum
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Veritas
9 Sep 2014, 06:56 PM
Got any data on that?

Its possible cavemen wore poka dotted underwear.

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.
Both these clowns on ignore.

Is it just me or have the bulls been getting stupider in the last few months? Hate to jump to conclusions that it's a sign, but sheesh - they could at least learn to pull a sentence together before shooting off about their bullshit strategies. Then at least I could dignify them with a polite refutation.
"It were not best that we should all think alike; it is difference of opinion that makes horse races." - Mark Twain on why he avoids discussing house prices over at MacroBusiness.
"Buy land, they're not making any more of it." - Georgist Land Tax proponent Mark Twain laughing in his grave at humourless idiots like skamy that continually use this quip to justify housing bubbles.
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Massive
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Investor888
9 Sep 2014, 11:07 PM
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.



you just fighting for the sake of it ? im not really disagreeing with u at all apart from u saying most people get offset loans for their mortgages as the data says otherwise with only 35% of loans having offset accounts .. sure people may have on other mortgage for different property but thats not the point as that property is sitting there without the offset account ...

like i said i like the idea of IO loans with an offset account as if managed well can give you money when u need it and you pay down as you see fit... but because they are self managed they are inherently more risky as people/dumb money may tend to kick the can down the road and enjoy the extra credit they have...

edit: it would be interesting to ssee data of how quickly those with IO IP's pay down/accrue cash in their offset account to really gague the risk.. but IMO articles like OP arent something to be waved aside..
Edited by Massive, 10 Sep 2014, 12:36 AM.
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John Frum
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Bardon
9 Sep 2014, 10:22 PM
Yep the only good thing about the good old days is that they are thankfully in the past.
Yup, that's what the Salomon Brothers bond traders were screaming on Wall St in the 80's, as were the Goldman Sachs CDO architects of the 00's, and now the levered up Sydney investment property IO-offset-redraw-negatively-geared guys are saying it in the 10's.

They all managed to ditch the dreary past of foregoing immediate gratification, and found magic alchemical ways to conjure up fortunes from nowhere.
Edited by John Frum, 10 Sep 2014, 12:36 AM.
"It were not best that we should all think alike; it is difference of opinion that makes horse races." - Mark Twain on why he avoids discussing house prices over at MacroBusiness.
"Buy land, they're not making any more of it." - Georgist Land Tax proponent Mark Twain laughing in his grave at humourless idiots like skamy that continually use this quip to justify housing bubbles.
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Massive
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today
9 Sep 2014, 11:42 PM
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.
pretty much my assumption also .. would be good to get more info..
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Veritas
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Investor888
10 Sep 2014, 12:09 AM
You can have a loan with a redraw facility, and with/or without an offset account. They are NOT mutually exclusive.
Our last home loan - ING Direct has offset account, and redraw facility. We put extra money in the offset account to not affect the tax deductibility of the loan itself. The point was to Massive that Interest Only (even on a Primary Residence) does not mean you are not paying the loan off. It just means you are not forced to pay the principle each month, but can may the same extra repayments (as principle), and have it on-call via redraw facility on loan).

Most investors would now choose to also have an offset account linked, but for those without offset account, MOST loans these days have the redraw facility as part of a loan (for both interest only, or interest + principle).

RateCity Loan Compare - Not all loan providers
53 investment loans, of which 35 automatically have redraw facility. 21 have both redraw faciliity and offset account functionality.
96 owner occupier loans, of which 56 automatically have redraw facility. 35 have both redraw faciliity and offset account functionality.
Most investors?

You are pulling this from your arse.

You haven't a clue what most investors are doing. Where is the data? Evidence?

Meanwhile, international rating agencies are trying to remind thicko Australians that buying and selling houses to each other using phony money at prices well above economic fundamentals is not the path to riches but ruin.





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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miw
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today
9 Sep 2014, 11:42 PM
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.
Or it could just be that that particular investor has an offset on another loan already and doesn't need one on this loan. Furthermore, the particular no-frills product without the offset has a lower annual fee or was able to be negotiated at a lower interest rate.

You only want to have an offset on your highest-interest credit. Anywhere else will not get used.
The truth will set you free. But first, it will piss you off.
--Gloria Steinem
AREPS™
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Investor888
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John Frum
10 Sep 2014, 12:23 AM
Both these clowns on ignore.

Is it just me or have the bulls been getting stupider in the last few months? Hate to jump to conclusions that it's a sign, but sheesh - they could at least learn to pull a sentence together before shooting off about their bullshit strategies. Then at least I could dignify them with a polite refutation.
Beats the permanent stupidity of the bears.

The coming housing crash the bears talk about has outlasted the Y2K, 4 prime ministers, 7 NSW premiers and a GFC.
Still waiting!!!

Anyway, this "stupid" bull has purchase another 3 properties this year SO FAR!!. :D . You bears can either learn stuff, or keep whinging at how unfair life is, and how hard it is to get into the property market.
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Veritas
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Investor888
10 Sep 2014, 12:55 AM
Beats the permanent stupidity of the bears.

The coming housing crash the bears talk about has outlasted the Y2K, 4 prime ministers, 7 NSW premiers and a GFC.
Still waiting!!!

Anyway, this "stupid" bull has purchase another 3 properties this year SO FAR!!. :D . You bears can either learn stuff, or keep whinging at how unfair life is, and how hard it is to get into the property market.
So I expect you will be buying some new investment properties this year then?

How many?
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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