Much has been written recently by the RBA, banks, rating agencies and financial commentators regarding the “looming crisis facing home owners and investors” as Interest Only Loan terms expire.
Back in 2010 when the great majority of ten year interest only loans were written, home owners would seek an equity release secured against the family home to pay the deposit on an investment property they were seeking to purchase.
Let’s have a look at how the loans may have been written.
Bob & Carol have a family home valued at $500,000 with a mortgage of $275,000. They have found an investment property they want to negatively gear with an asking price of $375,000.
Bob and Carol have saved enough to pay the stamp duty on their new purchase but otherwise require 100% of the purchase price of their investment. Following discussions with their accountant or financial planner they approach a bank or mortgage broker seeking to refinance their home to 80% of its value and in so doing release $75,000 being their 20% equity contribution on the investment. Depending on the advice they received they possibly “split” loan repayments on the home refinance opting for P&I repayments on the underlying debt of $275,000 and interest only for 10 years on the $75k they borrowed as deposit. They take a loan of 80% of the investment ($300,000) and like the $75k, want interest only repayments for the first 10 years.
Back then the average loan term was 25 years. It’s coming up to the end of that initial 10 year interest only loan term and without lifting a finger the bank are about to ask Bob and Carol to pay off the $75k and the $300,000 in full over 15 years being the term remaining on their initial 25 year mortgages.
Bob and Carol are about to go from combined monthly payments today of say $3334 p.m. to $4664 p.m. a whopping increase of 40%
10 YEARS AGO
$275,000 X 25 years @ 4.79% = $1574 p.m.
$75,000 X 10 years IO @ 5.63% = $352 p.m.
$300,000 X 10 years IO @ 5.63% = $1408 pm
Total monthly repayments $3334 p.m.
$275,000 X 25 years @ 4.79% = $1574 p.m.
$75,000 X 15 years @ 5.63% = $618 p.m.
$300,000 X 15 years @ 5.63% = $2472 p.m.
Total monthly repayments $4664 p.m.
When Bob and Carol’s interest only loans convert to P&I, possibly in the next 6 – 18 months their combined investment loans of $375,000 (yes the principal loan amount hasn’t changed) will jump from $1760 p.m. to a staggering $3090 p.m.
Today we are going to talk through strategies for staying ahead of the ever changing “responsible lending” guidelines.
It occurred to me; who if anyone; shared the responsibility for placing investors in such an insidious position?
A quick, yet thorough ring around of lenders, solicitors and others in the know came back with a resounding “no-one other than the borrower”.
So where does that leave you or in this example, Bob and Carol
Sure you could jump on the Class Action “no win – no fee” bandwagon and throw yourself at the mercy of the courts thinking the recent Royal Commission into banking will save you but you’ll probably go broke waiting for your day in court and hey; let’s face it; banks have way deeper pockets than the lawyers funding these cases or the underfunded and overworked government agencies. And lets be honest, Bob and Carol probably had a plan 10 years ago that they’d sell one or other property and repay some or all of the loan.
No throwing yourself at the mercy of the courts is not the answer. Being pro-active and addressing the problem TODAY “head on” is your best chance of saving the ranch and possibly your cross collateralized family home. Yes you can bet your house on the fact the lender you approached back then crossed both mortgages so default on one meant default on both.
If you hold concerns regarding how you will meet your P&I obligations when that fateful day appears (closer than you think) or which of my properties will be impacted or how will I qualify; we strongly suggest you ACT NOW . Contact your accountant, financial planner or call 1800 801 999 and speak with our experienced professional staff and lets formulate a go forward plan that not only saves the family home but substantially reduces your looming increase in mortgage repayments.
Written by Richard Aulsebrook