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Bank limits lending due to IO, not P&I

Discussion in 'Finance & Banking' started by Redman, 17th Aug, 2009.

  1. Redman

    Redman Member

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    Hi all,

    Just found out an interesting point from my lender (ANZ) when applying for a loan for another investment property. We have a PPOR and IP, both with IO loans. Applied for a 3rd IO loan, and the lending limit was lower than I expected:(.

    This was due to the fact that the bank calculates our serviceability for IO loans based on paying the loans off as if they were P&I over 20 years (we have loans for 30 years, with 10 years IO). I haven't come across this being talked about anywhere here, or elsewhere for that matter - is this normal? Or just ANZ? I spose from the banks point of view it makes sense.

    We went IO loans to free up cash to buy more IP's, but from the banks point of view, it has actually hindered us. We tested this, and could borrow a lot more if the 3rd loan was P&I. ($100 a week higher repayments though, but gave us around $100k more borrowing power).

    Have others experienced this? Anyone decide to go P&I because of this reason?

    Cheers,
    Red.
     
  2. Billv

    Billv Getting there

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    Not me, I always go IO but you could take a PI loan and then call them up and switch to IO after it settles
     
  3. Redman

    Redman Member

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    Hi Billv,

    I asked exactly this, but was told they'd re-evaluate my lending position when switching, hence would most likely say I cant afford to.

    Strange I've never heard of this before. Has made me re-think my strategy. Did some calcs, and for the same weekly repayments, the bank will let us borrow MORE if going P&I vs IO.

    Hmmmmm......:confused:
     
  4. Billv

    Billv Getting there

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    Cannot afford it?
    I'm sure it will be the other way around but they probably want you to be paying down the loan so that over time they hold more security
     
  5. Redman

    Redman Member

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    Exactly - I can afford a 30yr IO loan better than a 30yr P&I loan (obviously), but when the bank looks at it, and assess serviceability for the 30yr IO loan as a 20yr P&I loan, clearly it will drastically reduce my borrowing power (I'm limited by income, not equity).

    Anyone else had this situation??
     
  6. jason626

    jason626 Member

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    i don't get why everyone thinks interest only loans are so much better than p@I loans, they are only slightly cheaper to have and are based on the expectation that property prices will rise and offset the fact that your loan will be the same as it was at the begining, and they have the benifet of being able to pay the year in advance to bring the deduction earlier for that tax year. But why not pay a bit more each fortnight and pay of the principal off as well so you and up with less debt and more equity.
     
  7. Redman

    Redman Member

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    Agreed jason626, I want to end up with less debt, but while still having non-deductible debt on my PPOR, I wish to reduce this first by using any money saved on my IPs by having them IO vs P&I. I also did it to use this saved money to help fund the IO repayments on another IP, but because of the reason stated at the start of this thread, the IO loans have reduced my borrowing capacity from the bank's perspective.

    I'm considering putting an IO loan back to P&I purely to enable me to borrow more from the bank.

    Cheers,
    Red.
     
  8. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    It's about cashflow and effective use of after-tax dollars.

    Growing the equity in your home by using after-tax dollars (ie money you've been paid as salary and already paid tax on) is a very slow and inefficient way of building equity.

    If you are investing in real estate for growth, then you need to rely on that growth to increase the equity while minimising your holding costs, IO loans are the best way to do that.

    If you want to increase your equity by paying off some of your loan, then you can still do this with an IO loan - but you get to do it on your terms, not on the banks terms. P&I loans force you to make repayments when the bank wants you to.

    It's all about managing cashflow and maintaining control.

    If you are running into servicability limits with the bank because you don't have enough income, then perhaps you are trying to buy beyond your means - look for a cheaper property.

    Another suggestion is to get yourself a good investment-savvy mortgage broker - these guys are worth their weight in gold and can save you a lot of time and money through their knowledge of servicability models used by the banks and helping you identify which lenders are likely to lend you the money you need even before you apply.
     
  9. Redman

    Redman Member

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    I think I'll go down that path, Sim. We're not trying to go beyond our means, as we know exactly what we can (or choose to) afford, but the bank wont give it to us. Maybe a good broker will be able to help us out.

    Anyone got any suggestion for a broker in metro Adelaide?

    Cheers,
    Red.
     
  10. GregR

    GregR Reid Consultants

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    Redman,
    Some lenders will offer to do IO longer than 5 years, some to 10 and 15 years but place restrictions on the borrowing capacity. I normally recommend an IO loan for a 5 year term and banks generally treat these the same as a P&I loan as to borrowing capacity and LMI.

    After 5 years you will normally have revalued and refinanced anyway if not before. The LMI costs are often more expensive for longer term IO loans as lenders and mortgage insurers perceive a higher risk (although the logic of that in nonsensical, but we are talking about banks).

    Sim hits the nail on the head, IO loans are about you controlling the flow of funds, using the extra $300 a month or so principal you would otherwise have to pay off a P&I loan for your own purposes, often to pay your own non deductible debt (home loan). The other reason is the time value of money, a $300k loan today will still be $300k in 5 years time but the purchasing power of that in today's dollars may be far lower.

    Ultimately it is about net wealth, assets minus liabilities but you control which you increase and which you decrease and when.
    Investors will often use a broker in another state, so track down a specialist who is an investor themselves and understands what your needs are.
    Good luck
     
  11. Saskatoon

    Saskatoon Well-Known Member

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    Hi,
    Debbie Kelly at "Money Advisers" knows her products (ex-banker) and is a property investor herself.
    She has reset my investment loans to advantage & recently squeezed high LVR on my daughter's first home loan.


    Note: I am not entitled to any benefit from this recommendation.
    (The CEO is a former client and neighbour).
     
  12. Redman

    Redman Member

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    Just confirming what GregR stated (thanks Greg!), went to a broker and quite often the big banks will assess repayments of a 30yr loan with 10yrs IO as a 20yr P&I loan, which DRAMATICALLY reduces your borrowing capacity.

    There are smaller non-bank lenders (eg RAMS) which assess your repayments as they actually are (ie 30yr loan with 10 yrs IO has repayments assessed as 30yr IO loan). Therefore, I can borrow up to what I can actually afford, as I'm going to keep it all IO through refinancing, etc.

    Moral of the story - work out what you can afford and go out to a broker - dont just let a single bank dictate what you can borrow.

    Cheers all!
    Red
     
  13. GregR

    GregR Reid Consultants

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    Redman,
    Here is a quote from a recent Westpac policy (PIF = principal, interest & fees)

    "Where the new loan contains a residual PIF term, the PIF repayment used by us will be based on the total (actual) term. (e.g. if new loan is for 25years overall term, and initial 5yrs IO, then serviceability will be based on 25yrs PIF repayment.)"

    This makes it even tougher than before for an investor where they previously calculated over a 30 year term on a P&I basis.
    Regards,
    Greg
    Reid Consultants | Mortgage broker, Williamstown, Melbourne, home loans, commercial finance, reverse mortgages, seniors
     
  14. Redman

    Redman Member

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    Exactly what I've found Greg. 'spose they're only trying to protect themselves.

    Luckily I found someone who assesses serviceability based on ACTUAL REPAYMENTS.

    Cheers,
    Red.