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Interest only loans are Australia’s subprime
Topic Started: 16 Oct 2014, 10:35 AM (11,218 Views)
Veritas
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Sydneyite
31 Oct 2014, 01:22 PM
Because the banks won't lend you more just because you go IO instead of P&I - go try it. In fact the opposite is often the case.
I don't know what you mean. Its about your ability to repay.

Lets say I want to borrow 400k.

If I pay P+I, my monthly payments will be significantly higher than if I elect to go interest only.

I decided that I am willing to go IO because

1. I just want to own a house
2. I believe that house prices will rise mitigating any risk of not paying principle for 5 years.

Are you saying that the banks wont let me go IO under these circumstances?
A Lurker
31 Oct 2014, 01:30 PM
I'm talking about Australian securitisation and (separately) Australian covered bonds.
Alright, then its a very different system.

And apart from being able to get loans off balance sheet, Im not sure why it is a good deal for the originators.

And it seems like a bloody excellent deal for the bond holders.
Edited by Veritas, 31 Oct 2014, 01:33 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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You Have No Experience
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Veritas
31 Oct 2014, 01:31 PM
I don't know what you mean. Its about your ability to repay.

Lets say I want to borrow 400k.

If I pay P+I, my monthly payments will be significantly higher than if I elect to go interest only.

I decided that I am willing to go IO because

1. I just want to own a house
2. I believe that house prices will rise mitigating any risk of not paying principle for 5 years.

Are you saying that the banks wont let me go IO under these circumstances?
Mr Veritas, have you ever had a loan in your entire life? I'm guessing not?
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Sydneyite
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Veritas
31 Oct 2014, 01:31 PM
I don't know what you mean. Its about your ability to repay.

Lets say I want to borrow 400k.

If I pay P+I, my monthly payments will be significantly higher than if I elect to go interest only.

I decided that I am willing to go IO because

1. I just want to own a house
2. I believe that house prices will rise mitigating any risk of not paying principle for 5 years.

Are you saying that the banks wont let me go IO under these circumstances?
I'm saying that if you want to borrow $400k, that even if you want IO you would still have to satisfy their lending criteria based on you paying P&I on a loan of that amount. What's more, they may even apply a more stringent criteria than that if you want IO - especially if you do not gave a proven / solid credit history and so on.
For Aussie property bears, "denial", is not just a long river in North Africa.....
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Veritas
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You Have No Experience
31 Oct 2014, 01:35 PM
Mr Veritas, have you ever had a loan in your entire life? I'm guessing not?
Yes, I took out a loan of 50 dollars from my friend Dave for an hour with your mum.

Waste of money.
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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Sydneyite
31 Oct 2014, 01:42 PM
I'm saying that if you want to borrow $400k, that even if you want IO you would still have to satisfy their lending criteria based on you paying P&I on a loan of that amount. What's more, they may even apply a more stringent criteria than that if you want IO - especially if you do not gave a proven / solid credit history and so on.
Yep. Much easier if you have skin in the game and an existing house for security. Like a checklist--tick the boxes.
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peter fraser
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Veritas
31 Oct 2014, 01:31 PM
I don't know what you mean. Its about your ability to repay.

Lets say I want to borrow 400k.

If I pay P+I, my monthly payments will be significantly higher than if I elect to go interest only.

I decided that I am willing to go IO because

1. I just want to own a house
2. I believe that house prices will rise mitigating any risk of not paying principle for 5 years.

Are you saying that the banks wont let me go IO under these circumstances?

Alright, then its a very different system.

And apart from being able to get loans off balance sheet, Im not sure why it is a good deal for the originators.

And it seems like a bloody excellent deal for the bond holders.
What Sydneyite is saying is correct. Choosing I/O repayments doesn't mean that they use the I/O payments in their serviceability calculations. They MUST use the full P&I with an added buffer and if it doesn't service you don't get the loan.

We mortgage brokers can fluff about reducing credit card limits and things like that to get a marginal deal to work, but essentially if you don't have the capacity to service P&I repayments at the "assessment rate of interest" you won't get you loan.

IN ADDITION if you choose say a loan term of 30 years with I/O repayments for the first 5 years, then the P&I repayments then get calculated over 25 years at the "assessment rate of interest"

In effect choosing I/O makes it HARDER to get the loan.

Does that explain it?


NB - assessment rate of interest - Most banks calculate that as the Standard Variable Rate plus 1.5% less any permanent discount given. That works out to be around 7.5% for most lenders - ING just use 8% for everything.

The lowest assessment rates are reserved for those who get the biggest discounts, and that's a function of larger loan size and low LVR.
Any expressed market opinion is my own and is not to be taken as financial advice
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Veritas
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Sydneyite
31 Oct 2014, 01:42 PM
I'm saying that if you want to borrow $400k, that even if you want IO you would still have to satisfy their lending criteria based on you paying P&I on a loan of that amount. What's more, they may even apply a more stringent criteria than that if you want IO - especially if you do not gave a proven / solid credit history and so on.
And what I am saying is that you guys were suggesting earlier that investors are all in effect, paying principle by storing money in offset accounts. That sounds reasonable, but we have no numbers on it.

I am also saying that it seems reasonable that Owner occupiers might take IO loans so they can make the payments on houses that they could otherwise not afford.
peter fraser
31 Oct 2014, 01:46 PM
What Sydneyite is saying is correct. Choosing I/O repayments doesn't mean that they use the I/O payments in their serviceability calculations. They MUST use the full P&I with an added buffer and if it doesn't service you don't get the loan.

We mortgage brokers can fluff about reducing credit card limits and things like that to get a marginal deal to work, but essentially if you don't have the capacity to service P&I repayments at the "assessment rate of interest" you won't get you loan.

IN ADDITION if you choose say a loan term of 30 years with I/O repayments for the first 5 years, then the P&I repayments then get calculated over 25 years at the "assessment rate of interest"

In effect choosing I/O makes it HARDER to get the loan.

Does that explain it?


NB - assessment rate of interest - Most banks calculate that as the Standard Variable Rate plus 1.5% less any permanent discount given. That works out to be around 7.5% for most lenders - ING just use 8% for everything.

The lowest assessment rates are reserved for those who get the biggest discounts, and that's a function of larger loan size and low LVR.
Yes, so the mortgage can be approved on the following basis.

1. You can pay nothing but interest for the first five years.
2. But we will only let you do that if we are satisfied that you can handle the reversion to p+ I when the time comes.

Right?
Edited by Veritas, 31 Oct 2014, 01:49 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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Guest
Unregistered

Veritas
31 Oct 2014, 01:44 PM
Yes, I took out a loan of 50 dollars from my friend Dave for an hour with your mum.

Waste of money.
In other words no you haven't ever had a loan. Noted.
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peter fraser
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Veritas
31 Oct 2014, 01:47 PM
Yes, so the mortgage can be approved on the following basis.

1. You can pay nothing but interest for the first five years.
2. But we will only let you do that if we are satisfied that you can handle the reversion to p+ I when the time comes.

Right?
It can be, subject to other considerations that would include age, loan purpose, overall financial strength, income stability, and LVR.

You won't get I/O loans at 95% plus LMI, lenders and in particular mortgage insurers want to see some equity.

Age can be a huge factor later in life, lenders want loans repaid over what they would deem to be your natural working life. I'm talking home loans, not business loans. There are many older businessmen and women who are active corporate borrowers.
Edited by peter fraser, 31 Oct 2014, 01:57 PM.
Any expressed market opinion is my own and is not to be taken as financial advice
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Veritas
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Guest
31 Oct 2014, 01:48 PM
In other words no you haven't ever had a loan. Noted.
I just told you, I took a loan out to hire your mum for an hour.

She was willing, but overall the experience was a big let down.

Tell her she needs to drop her prices.
peter fraser
31 Oct 2014, 01:56 PM
It can be, subject to other considerations that would include age, loan purpose, overall financial strength, income stability, and LVR.

You won't get I/O loans at 95% plus LMI, lenders and in particular mortgage insurers want to see some equity.

Age can be a huge factor later in life, lenders want loans repaid over what they would deem to be your natural working life. I'm talking home loans, not business loans. There are many older businessmen and women who are active corporate borrowers.
Okay, well then we get to the nub of what Moody's is saying.

The danger here is OO IO mortgages.

To which all the arguments around investors/offset accounts/ tax burden etc don't apply.
Edited by Veritas, 31 Oct 2014, 02:00 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
Profile "REPLY WITH QUOTE" Go to top
 
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