Forums / Getting Technical / Finance / New bank regulations on I O loans and property portfolio investors.

Viewing 13 posts - 1 through 13 (of 13 total)
  • Profile photo of PollyannaPollyanna
    Participant
    @vansprang
    Join Date: 2017
    Post Count: 3

    Hi all,
    Curious to hear how other multi property investors are are dealing with the new 10 year IO regulations which most banks seem to be adopting? Coming from the mid 2000 investment property junket, this new change has had a huge impact on me. On 20 year loans, the max has been reached, and I am now faced with P&I for a large number of properties in a declining market. Originally, the IO term was 5 years with 15 max renewal overall. There is no way that rents will cover, and my monthly shortfall will be huge. I need that extra 5 years, but it seems the big 4 are steadfast on the new ruling. Any ideas on how to avoid a massive sell off? I am currently going through revaluations and new financial reports with my bank, but they have said that the IO period definitely cannot be extended beyond 10 years.
    There will be a large amount of people affected by this, especially those investors who followed all the early rules of investing “save your cash flow, increase your portfolio, increase your rents” but I don’t think I ever heard a warning about ” but” only for 10 years, because then your repayments will double and your income has to furnish the shortfall”. This may be sustainable in the capital cities, but definitely not in rural areas.This is a huge deal, and new investors thinking they are going to grow their portfolios based on the IO principle,should be discussing this, in depth!
    As for us older investors, who are now faced with firesales, or dipping into savings until a solution can be found, the coming months will be very testing.Any suggestions would be appreciated.

    Profile photo of Corey BattCorey Batt
    Participant
    @cjaysa
    Join Date: 2012
    Post Count: 1,010

    Hi Pollyanna,

    This is something that many investment focussed brokers are working on daily to assist clients from falling off a cliff with their effective cash flow.

    The main issue itself isn’t so much interest only renewals – but that the lenders borrowing capacities for investors in the last 18 months have dropped significantly, so those who were previously approved with IO periods no longer qualify, so they cannot easily refinance with their existing lenders for a new IO period.

    If you’ve only spoken with the big 4 banks re; IO extensions, it would be worth speaking with an investment focussed finance strategist who can look at your options. There’s a number of lenders who work specifically with investors in this space who have substantially higher borrowing capacity calculators which enable refinance and extension of IO periods beyond what you may be receiving.

    In the end however it’s only possible to kick the can down the road so far, there is a point at which everyone will need to plan what their retirement strategy is – whether this is through debt reduction, partial sale to reduce debts, rolling over to P&I with a substantial cash flow to mitigate the repayments etc. Those in the 55-65 yr old space are the ones most likely to be affected by this, as lenders new servicing + age policies can trap people into P&I repayments which they were not factoring for 10+ years.

    Corey Batt | Precision Funding
    http://www.precisionfunding.com.au
    Email Me | Phone Me

    Investment Focused Finance Strategist - servicing Australia-wide

    Profile photo of PollyannaPollyanna
    Participant
    @vansprang
    Join Date: 2017
    Post Count: 3

    Thanks Corey. Your last sentence hit the nail right on the head. we have been property investors for the past 20 years,and age has crept up on us. Nearing retirement, the substantial cashflow has gone. Everything has gone according to plan, except this curve ball which has been thrown. 10 years ago, IO loans were the next best thing, freeing cash to allow more properties to be purchased. Yes, I did follow all the forums, and decided to follow the IO and then live of equity strategy. All works great, EXCEPT, the IO for over 10 years had been scrapped, and the values have suffered greatly from the downturn( rural areas) P and I for 6 properties is going to hurt us badly, as I am sure it will many others in the same boat.i feel we are near the bottom of the market, in our area,and selling off slowly , over the next 5 years, would be the smartest thing to do, rather then having to fire sale. If the loans are refinanced for an extra 10 years( 20 year loans currently), does this then reset the loans and enable a further IO term? Our income is still fully able to service IO, but not an extra $1ok per month!

    Profile photo of Corey BattCorey Batt
    Participant
    @cjaysa
    Join Date: 2012
    Post Count: 1,010

    So long as you fit the overall potential lenders policies, there is likely potentially options for you to get a new 30 year loan with 5-10 years IO which will give you that last leg of breathing space to have further rental growth, debt erosion and potentially sell some down to give you a more effective cash flow position.

    Corey Batt | Precision Funding
    http://www.precisionfunding.com.au
    Email Me | Phone Me

    Investment Focused Finance Strategist - servicing Australia-wide

    Profile photo of D.T.D.T.
    Participant
    @dtraeger
    Join Date: 2014
    Post Count: 128

    @vansprang Have a chat with corey about your situation, he can let you know whether you can get that IO extension for another period. Some banks will and some won’t, and the ones that will have different requirements. Best to talk to the pros on this one.

    D.T. | DT Property Management
    http://www.dtproperty.com.au
    Email Me | Phone Me

    Adelaide Property Management - whole Adelaide metro

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,110

    Refinancing may not be an option if the values have dropped. If the LVRs are still adequate it may be your best option however as you can start a new fresh IO term and also extend the total loan term to 30 years which will make the minimum PI payments lower when it does revert. but you will have to service to do this.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of PollyannaPollyanna
    Participant
    @vansprang
    Join Date: 2017
    Post Count: 3

    Thanks Corey,DT and Terry. We are going through the revaluation process at the moment, and waiting for financials to be finalised, so I am still in the “finding where we stand” section of this journey.
    Bank has paid for the valuations-1st plus.Hopefully they will give me the valuations if I request them, as they have in the past. Financials are still looking good enough-2nd plus.
    Our best hope therefore is the refinance option with extension to the loan term, for an extra 10 years( original loans were only 20 year loans as previously disclosed)As Terry said, yes we will have to service these loans, until we can start our sell off, and the Principal component obviously will not be a tax deduction, if IO is not available.However, the principal component should not be that large in the first few years, allowing us to still use the negative gearing of the IO component. I do want to be prepared with all the information I can gather,to make it clear that I am prepared to ditch our 30 year banking relationship,if they make it too difficult,but I have to be able to back this up, if they still refuse to step outside their new box.

    Bearing in mind that this is a 5-7 year retirement strategy, and not a wealth accumulation strategy:

    1- All loans are X-coll,a horrible reality, but a very advantageous strategy at the time.Unfortunately it means that the 5 properties we thought we owned, aren’t really owned at all.Fortunately it does mean the the LVR should still hold favourably, as it will be taken across the entire portfolio.
    Question- if a refinance is on the table, should i try to uncross the 6 remaining loans,or is this not important/or possible at this stage of debt reduction.We plan to sell 3 of these encumbered properties anyway- 2 at devalued prices and 1 at an increased price, to balance loss against gain.I don’t believe an other lender would take out stand alone loans on some of the devalued properties without some form of xcoll,or hefty deposit to get the LVR down to their acceptable level, anyway. (How the banks distribute their “held X coll security” was a real eye opener.I was shown the security graph by my manager.The majority of debt is held against our PPR, even though we paid it off 15 years ago.We have always had the ability to direct excess funds of sales to which ever account we chose, however, whether that was for our own use or to pay of other loans)

    2-We have to provide a statement of position-first time in about 10 years-for the overview. We have accounts with other banks,as a strategy to not have all our money with the same institution.
    Question-is it a legal requirement to disclose all assets held? Is there a chance that my bank will request a transfer of all our funds, to their accounts, as more security to be held over our loans?Can we refuse to do so, and if so, is there any benefit in doing so?

    3- As naive as it may seem, we have never dealt with brokers.We ran a business, and the bank was always very compliant with our needs.Do investors generally deal with brokers online,or stay with brokers in their own locality? I realise that brokers make their money from the deals they forge with their lenders, but does this apply to interstate applications? If my bank disappoints me, I will be looking at other options.

    4- Regarding age restrictions and new loan lending.I believe it is now illegal to judge an application based on the applicants age.Rather, serviceability, income,income security ,relationship etc are the main criteria for the application.Can someone clarify this?

    Thanks all.

    • This reply was modified 2 years, 5 months ago by Profile photo of Pollyanna Pollyanna.
    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,110

    You should avoid cross in 99% of cases as there is no benefits to you.

    But with 5 years to retirement you should avoid it even more. Get them uncross whenever possible.

    Imagine you are nicely retired and decided to sell one property so as to get more expenses to live on. You find a buy and sell and after paying out the loan you will have say $200,000 cash which could fund your living expenses for the next 6 years.

    Close to settle you send in the discharge of mortgage form. Your lender then asks you to fill in more forms – they then say, if you are not working you cannot afford to keep the other loans so the bank, to protect itself, will keep all that $200,000 and apply it to the other loans.

    You now have nothing to live on (other than your other income) and have paid off investment debt.

    I’ve had at least 3 people approach me as a lawyer to try to help them with these situations – but there is nothing that can be done when one property secures many loans. Each of these persons has had their retirements, and lives ruined.

    One poor woman had about 3 or 4 properties and living on the rents which were low – about $20,0,000 per year. She didn’t qualify for the pension because of the asset base. She decided to sell one to get the proceeds to live on. She sold it and the bank took the lot. She now had even less to live on cause one rental income was gone. The loans were PI was paying down the remaining ones didn’t change the repayments per month but just left her with even less interest to claim, so the situation was actually worse.

    Yes it is a legal requirement to disclose your assets and liabilities truthfully.

    4. No it is not illegal. If fact it is the opposite. The lender has a duty of care to make sure they don’t lend to people who cannot afford a loan. If you are going to be over a certain age at some point during the loan term, often 75, then the bank will want to know what your exist strategy is – how are you going to repay a loan when you are not working. St George just updated their policy on this 2 days ago.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of blackhotelblackhotel
    Participant
    @blackhotel
    Join Date: 2010
    Post Count: 139

    Hi Pollyanna,
    You bring up some very important points to novice investors. I am a long term Property Investor (30yrs) and the advice given on IO loans is daunting at this time, however 20yrs ago it was a standard thing to do and without a thought.

    Something that is being pushed by so many lately is this Cash flow positive properties vs capital growth. People are buying in rural areas getting great cash-flow, but no growth. Even I am guilty of this as I purchased on the Gold Coast (huge mistake) 10yrs ago and there has been next to zero growth.

    What’s really important to remember is : LOCATION, LOCATION, LOCATION. 3 basic rules of property investing that I learned right from the onset of investing (luckily for me I had a smart uncle who gave me this advice).

    Also lucky for me I invested in Sydney’s prime east & inner west locations — beachfront, waterfront, views etc, etc. All these investments (for me) have gone up 150% in 10-15 years. However most were cash-flow negative.

    I had exactly the same problem 2 years ago whereas my loans were coming up to the 10yrs IO lapse and the Bank will not look at another IO term. one of my loans literally tripled in repayments. So I turned the tide against the bank and beat them at there own system. If you PM me I will explain. It worked for me, but it’s complicated and not cosha for most people on this site, however not illegal, just imaginative!

    Profile photo of JaxonJaxon
    Participant
    @jaxona
    Join Date: 2014
    Post Count: 282

    I feel either way the future for you is simple,

    address exaclty the Net worth and Debt you have,

    The structure of the loans and the limits of them.

    The time frame for each exact loan as I am guessing you did not purchase them all at once (although you may have)

    Now looking at what restructure options are avalaible (as stated above, your situation proves difficult)

    Doing all of this ahead of crunch time to ensure you dont end up loosing more than needed, if anything at all.

    Also points that may assist, Your Super fund if its self managed (MAY, MAY, MAY) be able to buy properties off yourself, clearing the debt and saving selling anything.

    as to other options there could be many but your exact situation dictates so much.

    feel free to email me if you would like assistance

    Kind regards

    Jaxon Avery

    [email protected]

    Profile photo of Simon DSimon D
    Participant
    @sduxiaof
    Join Date: 2002
    Post Count: 5

    Interesting topics. At broker’s advice, about 7 years ago, I take the portfolio loan from bank of melbourne (line of credit), interest only loan but without any time limit. However, the charge is that you have to pay higher interest rates. I am thinking how can I reduce the interest rate with bank without change the structure.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,110

    Interesting topics. At broker’s advice, about 7 years ago, I take the portfolio loan from bank of melbourne (line of credit), interest only loan but without any time limit. However, the charge is that you have to pay higher interest rates. I am thinking how can I reduce the interest rate with bank without change the structure.

    The only time you should use a portfolio loan is to access equity temporarily. Once it has been drawn down it would be best to convert the loan to a term loan interest only. Lower rate and less risk.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of Vin MorganVin Morgan
    Participant
    @vin-morgan
    Join Date: 2013
    Post Count: 7

    A portfolio loan should be viewed like an overdraft in a business. Short term movements in amounts drawn within the limit then paid back within a short period. A portfolio loan would suit a flipper who is trading property within a 12 months period. Investors who hold, as Terry said should be opting for a term loan.

    All investors should be calculating their investments with debt based on a principal and interest repayment basis at an average interest rate of say 8%. Unfortunately most investments would not make sense under these circumstances.

    Vin Morgan
    Mortgage Broker / Chartered Accountant
    MorCap Finance
    1300 911 499

    • This reply was modified 2 years, 1 month ago by Profile photo of Vin Morgan Vin Morgan.
    • This reply was modified 2 years, 1 month ago by Profile photo of Vin Morgan Vin Morgan.
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