Welcome Guest [Log In] [Register]


Reply
  • Pages:
  • 1
  • 5
  • 10
Interest only loans are Australia’s subprime
Topic Started: 16 Oct 2014, 10:35 AM (11,221 Views)
peter fraser
Member Avatar


Veritas
31 Oct 2014, 12:02 AM
Hmmmm...

Again, the whole point of securitisation is:

1. Get the loans of balance sheet so that more loans can be made while remaining within capital adequancy rules.
2. Risk is spread to all the bond holders who buy bonds from the SPV. They are the ones that get burned if the loan goes to shit; not the originators.

Posted Image
Australian lenders have a policy of 'risk retention"

Here is an extract from a 2012 Metlife report to the federal Reserve - see page 4
Pdf Here.

Quote:
 
Finally, we note that risk retention has been widely adopted either by regulation or voluntarily in jurisdictions such as the EU and Australia. During the last year and a half, we have seen well in excess of $100 billion of issuance come out of these markets, while meeting issuer risk retention requirements. We would argue that this is the clearest evidence that issuer risk retention costs do not make securitization uneconomical.


I'm not sure when it commenced but obviously risk retention measures are in place so that the original lender retains some skin in the game, for Australian RMBS.

Maybe someone else has more info that I do.

Edited by peter fraser, 31 Oct 2014, 01:11 AM.
Any expressed market opinion is my own and is not to be taken as financial advice
Profile "REPLY WITH QUOTE" Go to top
 
miw
Member Avatar


peter fraser
30 Oct 2014, 11:57 PM
I understand that our banks must take back non-performing loans and substitute them with a fresh performing loan and settle any value difference.
Even in the US these days, the writers of the loans have to take back loans that go bad if it can be shown that the loan appraisal did not meet standards.

For covered bonds, (which as far as I know is all that the major banks in Australia are currently writing) loans that go bad in the pool have to be replaced with performing loans.
Edited by miw, 31 Oct 2014, 01:49 AM.
The truth will set you free. But first, it will piss you off.
--Gloria Steinem
AREPS™
Profile "REPLY WITH QUOTE" Go to top
 
Guest
Unregistered

Interest only loans in most cases is subprime.

If somebody can not afford to pay off the loan, then they should not have the loan.

The whole joke makes me laugh. Dopes paying little if any deposit, negatively geared and intrest only loans on not only investment property but on ppors. While record overbuilding is going on, superfunds are being sucked dry, economic sectors we have had for generation after generation are collapsing, unemployment recently reached twelve years highs , and all western econies are experiencing wage declines for the first time in history.

One day you will all see who the government was actually working for. Them and their pay packets, nothing at all to do with citizens of this country, or the youth and future of this country.

Idiots............
"REPLY WITH QUOTE" Go to top
 
Investor888
Default APF Avatar


Guest
31 Oct 2014, 07:41 AM
Interest only loans in most cases is subprime.

If somebody can not afford to pay off the loan, then they should not have the loan.

The whole joke makes me laugh. Dopes paying little if any deposit, negatively geared and intrest only loans on not only investment property but on ppors. ......

Idiots............
Mate, it's you who's the idiot. You don't understand how financing works.

These days there are all sorts of loan options available.

Interest Only loans generally typically come with either redraw facility or a 100% offset account.
If I have a $300K loan, a lot of people would get interest only. Why lock money into the principle payments (that need a refinance to get out), when I can dump the extra money into an 100% offset account against the interest only loan. Effectively the same as P+I.

So on my $300K loan, a dump extra "payments" into the offset. Say I have $100K sitting in the offset account. I pay interest on only the net $300K-$100K ($200K) loan balance. And as a bonus, I have the extra repayments" available on-call, not locked into the home lome in principle repayments.

Your an idiot. Learn the basics, and you will understand why people structure their loans this way.

It's also for tax deductability. If I put money into principle or redraw on an investment property, then take money out for personal use, then that portion then becomes non-tax deductible (I can't claim the interest on this portion in tax returns). However with interest only and an attacked 100% offset account, I can take out money from the offset for personal use, and not impact the deductability of the loan
Edited by Investor888, 31 Oct 2014, 08:35 AM.
Profile "REPLY WITH QUOTE" Go to top
 
stinkbug
Member Avatar


Guest
31 Oct 2014, 07:41 AM
Interest only loans in most cases is subprime.

If somebody can not afford to pay off the loan, then they should not have the loan.

You're an idiot. Subprime status, IO vs P&I and serviceability are unrelated.

Go away and do some learning, you've made a complete tool of yourself.
---------------------------------------------------------------

While it's true that those who win never quit, and those who quit never win, those who never win and never quit are idiots.

Profile "REPLY WITH QUOTE" Go to top
 
A Lurker
Default APF Avatar


Veritas
30 Oct 2014, 11:52 PM
How does that work?

Surely the holder of the bonds issued by the SPV gets burnt in the event of a default and not the bank.

If the bank wears the risk, what risk are the bond holders carrying?

The whole point of securitisation from the banks perspective is to remove the loans from their balance sheets.


Not according to the RBA * pre GFC) I wonder are they making a comeback...

Posted Image
I've been involved in a few securitisations in Australia.

They are commonly issued using a warehouse of mortgages and, as PF points out, the issuer (bank) has the obligation to substitute out non-performing mortgages and add performing mortgages.

With covered bonds, the obligation to pay the coupon and principal at term is an obligation of the bank secured by the mortgages. They are not limited recourse. The bond holder is taking credit risk on the issuer (bank).

From your chart you'll see in 2009 that the big 4 did zero securitisation. Only the lesser banks, credit unions etc were in the market. The big 4 are about 80% of the mortgage market in Australia so only 20% of the market did any securitisation in recent years and at pretty small volumes (aggregate value).
Edited by A Lurker, 31 Oct 2014, 09:12 AM.
Profile "REPLY WITH QUOTE" Go to top
 
Sydneyite
Member Avatar


Investor888
31 Oct 2014, 08:34 AM
Guest
31 Oct 2014, 07:41 AM
Interest only loans in most cases is subprime.

If somebody can not afford to pay off the loan, then they should not have the loan.

The whole joke makes me laugh. Dopes paying little if any deposit, negatively geared and intrest only loans on not only investment property but on ppors. ......

Idiots............
Mate, it's you who's the idiot. You don't understand how financing works.

These days there are all sorts of loan options available.

Interest Only loans generally typically come with either redraw facility or a 100% offset account.
If I have a $300K loan, a lot of people would get interest only. Why lock money into the principle payments (that need a refinance to get out), when I can dump the extra money into an 100% offset account against the interest only loan. Effectively the same as P+I.

So on my $300K loan, a dump extra "payments" into the offset. Say I have $100K sitting in the offset account. I pay interest on only the net $300K-$100K ($200K) loan balance. And as a bonus, I have the extra repayments" available on-call, not locked into the home lome in principle repayments.

Your an idiot. Learn the basics, and you will understand why people structure their loans this way.

It's also for tax deductability. If I put money into principle or redraw on an investment property, then take money out for personal use, then that portion then becomes non-tax deductible (I can't claim the interest on this portion in tax returns). However with interest only and an attacked 100% offset account, I can take out money from the offset for personal use, and not impact the deductability of the loan
Excellent post and spot on. I would also add the another key advantage of IO for your PPOR loan with offset account, is that if you ever need to move for work or something, or want to travel o/s for an extended period, you can then rent out your PPOR, move the offset cash elsewhere, and claim 100% of the interest on your original loan amount as a tax deduction against the rent your receive. This enables you to rent elsewhere and break even after tax. With a P&I loan, the more you have paid off, the worse your position becomes in this scenario - ie you receive rent from your PPOR, have to pay some/heaps of tax on it, and then you have to pay rent on your new place with after tax dollars as well. Might as little as half the rent you receive to cover your new outgoing rent (if you own outright), vs up to 100% of it with the IO approach.

So there are many perfectly financially sensible reasons to go IO on your PPOR. In the past (say 15 years ago) the banks did not really have the facilities available to "oridinary" people for this sort of thing. Now they do, and it's a good thing. That's why it's growing for PPOR mortgages now. Also, it takes time for a market to "get comfortable" with these ideas, and for them to gain widespread popularity - that's the other reason IO loans have been rising as this plays out. I would always recommend this approach to anyone for the flexibilty it provides, at no extra cost or risk.
Edited by Sydneyite, 31 Oct 2014, 10:32 AM.
For Aussie property bears, "denial", is not just a long river in North Africa.....
Profile "REPLY WITH QUOTE" Go to top
 
Investor888
Default APF Avatar


Sydneyite
31 Oct 2014, 10:23 AM
Excellent post and spot on. I would also add the another key advantage of IO for your PPOR loan with offset account, is that if you ever need to move for work or something, or want to travel o/s for an extended period, you can then rent out your PPOR, move the offset cash elsewhere, and claim 100% of the interest on your original loan amount as a tax deduction against the rent your receive.
Also if you want to buy a new PPOR, but want to keep the existing PPOR as an investment property.

The IO with 100% offset account allows you to just move all the offset money to the new PPOR (for deposit, repayments), and the original IO only loan on the original PPOR is then fully tax deductible as an investment property. In this case, if the loan was P+I, then moving the money to a new PPOR means from the ATO perspective you are using the money for personal purposes (a new ppor), so the money you take out of the P+I loan on the old PPOR is then NOT tax-deductable.

Interest only is the smartest way to structure the loans.
Profile "REPLY WITH QUOTE" Go to top
 
Sydneyite
Member Avatar


Investor888
31 Oct 2014, 10:37 AM
Sydneyite
31 Oct 2014, 10:23 AM
Excellent post and spot on. I would also add the another key advantage of IO for your PPOR loan with offset account, is that if you ever need to move for work or something, or want to travel o/s for an extended period, you can then rent out your PPOR, move the offset cash elsewhere, and claim 100% of the interest on your original loan amount as a tax deduction against the rent your receive.
Also if you want to buy a new PPOR, but want to keep the existing PPOR as an investment property.

The IO with 100% offset account allows you to just move all the offset money to the new PPOR (for deposit, repayments), and the original IO only loan on the original PPOR is then fully tax deductible as an investment property. In this case, if the loan was P+I, then moving the money to a new PPOR means from the ATO perspective you are using the money for personal purposes (a new ppor), so the money you take out of the P+I loan on the old PPOR is then NOT tax-deductable.

Interest only is the smartest way to structure the loans.
Yes - this too.

Veritas - does all that answer your original questions about why are IO loans (for both PIs and PPORs) have been growing in popularity? It should. :dry:
For Aussie property bears, "denial", is not just a long river in North Africa.....
Profile "REPLY WITH QUOTE" Go to top
 
A Lurker
Default APF Avatar


Investor888
31 Oct 2014, 10:37 AM
Also if you want to buy a new PPOR, but want to keep the existing PPOR as an investment property.

The IO with 100% offset account allows you to just move all the offset money to the new PPOR (for deposit, repayments), and the original IO only loan on the original PPOR is then fully tax deductible as an investment property. In this case, if the loan was P+I, then moving the money to a new PPOR means from the ATO perspective you are using the money for personal purposes (a new ppor), so the money you take out of the P+I loan on the old PPOR is then NOT tax-deductable.

Interest only is the smartest way to structure the loans.
Even without all the 'setting up for investment' scenarios there are good reasons to go IO for your PPOR and use an offset or redraw facility, including:

- keeping the full amount of principal paid down available to re-draw for renovations (i.e. improving the property)
- if you initially buy a starter home, keeping the principal paid down available for writing a cheque for the deposit for the next home without needing to go to the bank at that time
- generally just flexibility
Profile "REPLY WITH QUOTE" Go to top
 
1 user reading this topic (1 Guest and 0 Anonymous)
ZetaBoards - Free Forum Hosting
Free Forums with no limits on posts or members.
Go to Next Page
« Previous Topic · Australian Property Forum · Next Topic »
Reply
  • Pages:
  • 1
  • 5
  • 10



Australian Property Forum is an economics and finance forum dedicated to discussion of Australian and global real estate markets and macroeconomics, including house prices, housing affordability, and the likelihood of a property crash. Is there an Australian housing bubble? Will house prices crash, boom or stagnate? Is the Australian property market a pyramid scheme or Ponzi scheme? Can house prices really rise forever? These are the questions we address on Australian Property Forum, the premier real estate site for property bears, bulls, investors, and speculators. Members may also discuss matters related to finance, modern monetary theory (MMT), debt deflation, cryptocurrencies like Bitcoin Ethereum and Ripple, property investing, landlords, tenants, debt consolidation, reverse home equity loans, the housing shortage, negative gearing, capital gains tax, land tax and macro prudential regulation.

Forum Rules: The main forum may be used to discuss property, politics, economics and finance, precious metals, crypto currency, debt management, generational divides, climate change, sustainability, alternative energy, environmental topics, human rights or social justice issues, and other topics on a case by case basis. Topics unsuitable for the main forum may be discussed in the lounge. You agree you won't use this forum to post material that is illegal, private, defamatory, pornographic, excessively abusive or profane, threatening, or invasive of another forum member's privacy. Don't post NSFW content. Racist or ethnic slurs and homophobic comments aren't tolerated. Accusing forum members of serious crimes is not permitted. Accusations, attacks, abuse or threats, litigious or otherwise, directed against the forum or forum administrators aren't tolerated and will result in immediate suspension of your account for a number of days depending on the severity of the attack. No spamming or advertising in the main forum. Spamming includes repeating the same message over and over again within a short period of time. Don't post ALL CAPS thread titles. The Advertising and Promotion Subforum may be used to promote your Australian property related business or service. Active members of the forum who contribute regularly to main forum discussions may also include a link to their product or service in their signature block. Members are limited to one actively posting account each. A secondary account may be used solely for the purpose of maintaining a blog as long as that account no longer posts in threads. Any member who believes another member has violated these rules may report the offending post using the report button.

Australian Property Forum complies with ASIC Regulatory Guide 162 regarding Internet Discussion Sites. Australian Property Forum is not a provider of financial advice. Australian Property Forum does not in any way endorse the views and opinions of its members, nor does it vouch for for the accuracy or authenticity of their posts. It is not permitted for any Australian Property Forum member to post in the role of a licensed financial advisor or to post as the representative of a financial advisor. It is not permitted for Australian Property Forum members to ask for or offer specific buy, sell or hold recommendations on particular stocks, as a response to a request of this nature may be considered the provision of financial advice.

Views expressed on this forum are not representative of the forum owners. The forum owners are not liable or responsible for comments posted. Information posted does not constitute financial or legal advice. The forum owners accept no liability for information posted, nor for consequences of actions taken on the basis of that information. By visiting or using this forum, members and guests agree to be bound by the Zetaboards Terms of Use.

This site may contain copyright material (i.e. attributed snippets from online news reports), the use of which has not always been specifically authorized by the copyright owner. Such content is posted to advance understanding of environmental, political, human rights, economic, democratic, scientific, and social justice issues. This constitutes 'fair use' of such copyright material as provided for in section 107 of US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed for research and educational purposes only. If you wish to use this material for purposes that go beyond 'fair use', you must obtain permission from the copyright owner. Such material is credited to the true owner or licensee. We will remove from the forum any such material upon the request of the owners of the copyright of said material, as we claim no credit for such material.

For more information go to Limitations on Exclusive Rights: Fair Use

Privacy Policy: Australian Property Forum uses third party advertising companies to serve ads when you visit our site. These third party advertising companies may collect and use information about your visits to Australian Property Forum as well as other web sites in order to provide advertisements about goods and services of interest to you. If you would like more information about this practice and to know your choices about not having this information used by these companies, click here: Google Advertising Privacy FAQ

Australian Property Forum is hosted by Zetaboards. Please refer also to the Zetaboards Privacy Policy