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Interest only loans are Australia’s subprime
Topic Started: 16 Oct 2014, 10:35 AM (11,220 Views)
Emmanuel
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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.
Yes, you've pretty much nailed it but it's easy to look so clever in front of a forum of people who don't really know how it all works. I should be able to get the same clear advice from a mortgage broker or financial adviser. Every suburb needs one. It's not your job to educate the populace and I would think that the responsibility lies with the government to run some type of public education campaign.
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Veritas
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Sydneyite
31 Oct 2014, 10:47 AM
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:
My questions was what accounts for the rise.

You guys are suggesting that it makes better sense tax wise to be, in effect, paying down principle in an offset account.

If that is true I would have thought the level of IO mortgages would be much more steady.
miw
31 Oct 2014, 01:47 AM
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.
But the people who got really burned were the bond holders not the originators.

Edited by Veritas, 31 Oct 2014, 11:56 AM.
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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Sydneyite
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Veritas
31 Oct 2014, 11:51 AM
Sydneyite
31 Oct 2014, 10:47 AM
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:
My questions was what accounts for the rise.

You guys are suggesting that it makes better sense tax wise to be, in effect, paying down principle in an offset account.

If that is true I would have thought the level of IO mortgages would be much more steady.
Veritas - I specifically addressed your questions in previous posts. The answers are once again:

1) Offset facilities, IO / LOC loans etc up until "recent" times were not available to ordinary folks

2) As these options became available, it takes time for the ideas of how to use them effectively to gain traction

3) (A new one) there was about 10-15 years ago a few key tax office rulings that effected / clarified the way banks had to offer these sorts of facilties for it all to be kosher from the ATOs perspective. When that certainty was established, these approaches also became more popular. Prior to those ruling many accountants advised against it.

So it is not surprising that the IO loan share is rising, rather than remaining flat.
Edited by Sydneyite, 31 Oct 2014, 12:33 PM.
For Aussie property bears, "denial", is not just a long river in North Africa.....
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Veritas
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A Lurker
31 Oct 2014, 09:11 AM


Quote:
 
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.


What happens to the non-performing loan then and the bonds that are issues against it?

Quote:
 
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).


Why did they stop do you know?


Sydneyite
31 Oct 2014, 11:59 AM
Veritas - I specifically addressed your questions in previous posts. The answers are once again:

1) Offset facilities, IO / LOC loans etc up until "recent" times were not available to ordinary folks

2) As these optios became available, it takes time for the ideas of how to use them effectively to gain traction

3) (A new one) there was about 10-15 years ago a few key tax office rulings that effected / clarified the way banks had to offer these sorts of facilties for it all to be kosher from the ATOs perspective. When that certainty was established, these approaches also became more popular. Prior to those ruling many accountants advised against it.

So it is not surprising that the IO loan share is rising, rather than remaining flat.
Okay, so they are becoming more popular because they are being marketed more successfully etc.

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?

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.
Edited by Veritas, 31 Oct 2014, 12:10 PM.
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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A Lurker
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Veritas
31 Oct 2014, 11:59 AM



What happens to the non-performing loan then and the bonds that are issues against it?



Loan goes back to the issuer and they give it to their work-out team to bring under control or collect.

RMBS holder gets nice new shiny performing loan.
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Shadow
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Evil Mouzealot Specufestor

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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.
People don't use IO loans because they can't afford to repay any principal. They use them because there are other (more financially beneficial) uses for the money that would otherwise have been used to repay principal - for example paying down a different loan, or investing the money elsewhere, or even just putting it in offset/redraw so they can more easily access it later if necessary.
Edited by Shadow, 31 Oct 2014, 01:08 PM.
1. Epic Fail! Steve Keen's Bad Calls and Predictions.
2. Residential property loans regulated by NCCP Act. Banks can't margin call unless borrower defaults.
3. Housing is second highest taxed sector of Australian Economy. Renters subsidised by highly taxed homeowners.
4. Ongoing improvement in housing affordability. Australian household formation faster than population growth since 1960s.
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Veritas
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Shadow
31 Oct 2014, 01:08 PM
People don't use IO loans because they can't afford to repay any principal. They use them because there are other (more financially beneficial) uses for the money that would otherwise have been used to repay principal - for example paying down a different loan, or investing the money elsewhere, or even just putting it in offset/redraw so they can more easily access it later if necessary.
Well actually, they do.

Why is it so implausible that someone would opt to go IO just to get on the ladder?
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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A Lurker
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Veritas
31 Oct 2014, 11:59 AM



Why did they stop do you know?

Pricing - before GFC pricing on securitisation was very cheap.

Equity apetite (also see pricing) - since GFC big 4 have easily been able to raise equity and debt financing from the markets as perceived as blue chip and there was been a move away from non-blue chip.

Rise of deposits - since GFC people are more keen to put their money on deposit with a big 4 bank (govt. guarantee) rather than into equity markets (and what money that goes into equity markets is disproportionately going to blue chips).

Smaller banks and credit unions have got some of the benefit of no. 3 above but not 1 or 2 so for capital management they need to still go to securitisation markets. Also APRA has imposed additional prudential standards (capital adequacy ratio) on the smaller players which also drives them in that direction.
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Veritas
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A Lurker
31 Oct 2014, 01:03 PM
Loan goes back to the issuer and they give it to their work-out team to bring under control or collect.<br /><br />RMBS holder gets nice new shiny performing loan.
And if it defaults who take the hit?
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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Emmanuel
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Shadow
31 Oct 2014, 01:08 PM
People don't use IO loans because they can't afford to repay any principal. They use them because there are other (more financially beneficial) uses for the money that would otherwise have been used to repay principal - for example paying down a different loan, or investing the money elsewhere, or even just putting it in offset/redraw so they can more easily access it later if necessary.
A logical answer from one of the forum's master blasters. In other words, why wrap your resources up when they can be used better elsewhere? A significant number of people are still stuck in this mindset of slow and steady, which is fine, but it's all how you can manage the financial resources to your advantage. It's only people such as Shadow who have the clarity to see this, even though it's conceptually very simple.
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