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Interest only loans are Australia’s subprime
Topic Started: 16 Oct 2014, 10:35 AM (11,215 Views)
zaph
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Veritas
31 Oct 2014, 11:59 AM
x
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But there is a massive assumption being made here. That assumption is that the mortgage holders in questions are making payments to the offset account ( this serves as a substitute for paying down P directly)

How do we know this? Where is the data?

I'd like to see some data on the issue too, but doubt it is easily available.

There would broadly be a few types of 're-payers':
1. Those that are extremely disciplined and always make the equivalent principle payment (and probably more) into their offset accounts. Only touching it for tax deduction reasons, emergencies (eg health costs, car blows up etc). Given it generally takes discipline to save a deposit, I would think this accounts for most re-payers.
2. Those that planned to do above, but never, or rarely manage to make their 'principle' payments to their offset accounts. Or have a 'valid' excuse to withdraw it once they see a decent balance - eg a holiday.
3. Those that never intended to make the principle payment to their offset. I think this % would be low.

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Isn't it just as plausible that at least some of these IO mortgage holders are people who, due to affordability issues, are using them just to get into the market? And , who, are in effect just paying interest and little if any principle through the offset account.

PF has said that banks assess loans on P&I repayments even if they are IO. So if mortgage holders are going IO due to affordability issues it is self inflicted affordability, not bank inflicted.

Shadow
31 Oct 2014, 01:28 PM
You're slipping out of character. You could learn a thing or two from BearTrap about staying in character. :lol
It's about time Bear Trap popped by and gave a few 100%+ guarantees. There's a whole generation of posters here who've never experienced his investment wisdom. I'm sure he would upset a few of the grizzly bears.

I wonder if it still works? Bear Trap. Bear Trap. Bear Trap.


Sydneyite
31 Oct 2014, 02:30 PM
There is no extra danger in the "rise" of IO PPOR mortgages, because:
I don't agree. There is some, but not a lot, of extra danger/risk in IO PPOR mortgages.

Edited by zaph, 31 Oct 2014, 07:34 PM.
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szokolay
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The bottom line is that 90% of investors have bought on these loans, which probably includes most of the investors on this forum. And home prices across Australia are back at 2007 levels. It's not a pretty picture.
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Chris
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miw
16 Oct 2014, 07:14 PM
Total nonsense. I am not able to negative gear anything, yet I use some IO loans.

Tax had absolutely no role to play in my decision to go IO on those loans.
Miw, like I have said in the past, the legite posters in here such as yourself are people who have by in large been responsible investors. Appetite for risk but at the same time risk averse.

I would think most people in Peters profession would be doing most of their business based on IO loans for the reasons I mentioned. It wasn't meant to be personal or specific to anyone just a spot light on the fact that IO loans in general are for NG investors for maximum tax avoidance/blood sucking.
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miw
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Chris
31 Oct 2014, 09:37 PM
Miw, like I have said in the past, the legite posters in here such as yourself are people who have by in large been responsible investors. Appetite for risk but at the same time risk averse.

I would think most people in Peters profession would be doing most of their business based on IO loans for the reasons I mentioned. It wasn't meant to be personal or specific to anyone just a spot light on the fact that IO loans in general are for NG investors for maximum tax avoidance/blood sucking.
Chris, I certainly won't say that IO loans weren't and aren't a tool used by some pretty speculative investors. Going back to the 1980s, the main use of IO loans was for speculation on mostly commercial property. Buy a place on an IO loan, rent it out at high yield for 10 years, and at the end of 10 years you would either sell or you would have to refinance. The betting was obviously that you had chosen your spot well and you would get some decent capital gain and the place would pay its holding costs in the meantime at quite a high gearing ratio.

But the other element in this mix was that commercial property was high enough yield that it would pay all the costs including the interest. This approach was never popular on resi because residential real estate is not volatile enough to get really good capital gains for speculators, and its yield is too low to cover the interest. Even in this case, the IO loan was not aimed at getting tax deductions - it was aimed at getting and keeping maximum leverage for 10 years while minimising cashflow drain. Being negatively geared does not help you here.

For resi these days, with the very different products now available, the main reason you would get some or all of your loans as IO is because it gives you maximum control of your leverage. Once you get the leverage ratio right for you, you can just keep it there. With P&I loans it just keeps decaying and you need to be applying for new finance. You also get maximum control over which loans you pay off first. If you are disciplined, the risk to *you* is actually lower with IO loans as well. There are just so many reasons to go that way that are significantly more important than tax minimisation, and IO loans don't get you to a higher leverage ratio than P&I anyway, so I'm afraid I cannot agree with your thesis.
The truth will set you free. But first, it will piss you off.
--Gloria Steinem
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