RBA wants to scrap interst only loans

[ok180]

http://www.smh.com.au/opinion/political-news/rba-warns-on-loan-risks-20120821-24kpa.html

Surprised no one posted this already. This isn't such a bad idea i feel at least for resi property loans.

 

[Sim]

I know of very few people who take out IO loans for their PPOR, and I don't know of any banks lending 100% of the valuation of a property, unless cross-collateralised against a portfolio of property with an overall max LVR of something around 80%.

I don't see a problem with Australian lending - indeed that's one of the reasons why we didn't get ourselves in such a mess like the US did ... we have relatively few risky residential mortgages handed out by the banks.

"The Reserve Bank paper, co-written by the head of its financial stability department, Luci Ellis"

That's not much different to an IT security person telling you that the best way to secure your computer is to disable all networking and USB ports etc. No data in or out = no hackers. Sure, it's effective - but a bit of overkill and introduces problems with flexibility and manageability.

I can tell you an even better way to avoid loan risks. No loans. Simple!

 

[buzzlightyear]

As quoted in the Age article

But many investors take out interest-only loans for 100 per cent of the property's valuation

Really?

The entire article focuses on LVR's and that's a legitimate debate, but interest only does not seem to be part of these reports at least mentioned in the article.

 

[evand]

Its a way of reducing the banks risk as borrowers will have to borrow less, all else being equal.

 

[Ausprop]

Its a way of reducing the banks risk as borrowers will have to borrow less, all else being equal.

government legislating to reduce corporate risk? so the banks are backed with the public purse string and too big to fail and now their risk appetite is being legislated - can anyone see why the big 4 are in private hands? these are government entities with a big greasy layer of profit smeared over the top that the populice has to pay for

 

[Rolf Latham]

Its a way of reducing the banks risk as borrowers will have to borrow less, all else being equal.

reality on a single bottom line deal ( 90 % of bank exposure ??) that is not the case.

With almost all lenders, if you take a PI PPOR loan, your END debt serviceability is approximately 14 % higher than if you take a10 year IO loan with a 20 year PI rollover

ta
rolf

 

[Rolf Latham]

But many investors take out interest-only loans for 100 per cent of the property's valuation.

True, some even 2000 %,but not without sufficient equity and APRA approved capital reserve........


Lets just hope the people contemplating the legislation have more sense than this comment.

100% lends in the way they are referring to here are Long dead gone and buried, and were only a VERY limited product offering here in the heady days.

ta
rolf

 

[Peter_Tersteeg]

The article is complete rubbish. Its statements directly contradict both bank policy on LVR and affordability assessment, and it goesn't even nod at current NCCP legislation. It's calling for monitoring which is already effectively in place.

If this is the basis for any sort of review, that review would be a complete waste of time and money. ASIC and lenders would simply laugh point to their lending criteria and demonstrate that the issues were addressed a long time ago.

Most of the comments are even worse. It's amazing how little about finance the general public actually understands. Nice to know that brokers will always be needed to educate the public.

 

[Aaron_C]

Just goes to show you that bureaucrats aren't equipped to tell the private sector how to run their business.

 

[HotRod]

Just goes to show you that bureaucrats aren't equipped to tell the private sector how to run their business.

...and some aren't even equipped to run a country.

 

[Rolf Latham]

It's amazing how little about finance the general public actually understands.

Joe Public didnt write the article.......... a finance journo did, thats the scary bit !

So perhaps the dumb ( as in ignorant) , leading the blind ?

ta
rolf

 

[buzzlightyear]

Joe Public didnt write the article.......... a finance journo did, thats the scary bit !

So perhaps the dumb ( as in ignorant) , leading the blind ?

ta
rolf

Hopefully it was Tim Colebatchs ghost writer. He is generally a good finance journalist

 

[ThomasAJ]

reality on a single bottom line deal ( 90 % of bank exposure ??) that is not the case.

With almost all lenders, if you take a PI PPOR loan, your END debt serviceability is approximately 14 % higher than if you take a10 year IO loan with a 20 year PI rollover

ta
rolf

Hi Rolf

Can you please expand on this. I do not 100% understand.

many Thanks

Tom

 

[Rolf Latham]

Hi Rolf

Can you please expand on this. I do not 100% understand.

many Thanks

Tom

Hi Tom

This is a good clarifying question

Most loans held by banks are loans where the borrower has NIL other mortgage secured debt, and the primary debt is a HOME loan.

If you had an income of x that would allow to borrow 500 000 given your other circumstances on a 10 year IO then 20 pi loan, most lenders would lend 14 % more or 570 000 with a 30 year PI loan..........

So, lenders criteria are well ahead of gov already............

ta
rolf

 

[Marty McDonald]

I don't think that is what they are trying to say. I think they mean even with other collateral they suggest limiting exposures by requiring purchasers to put hard earned deposit in rather than equity. No idea how you would achieve this but this is what they mean.

 

[Peter_Tersteeg]

If you had an income of x that would allow to borrow 500 000 given your other circumstances on a 10 year IO then 20 pi loan, most lenders would lend 14 % more or 570 000 with a 30 year PI loan..........

To further explain what Rolf is saying here, a 10 year interest only loan is assessed on what the repayments will be on the remaining 20 year principal and interest period after the the first 10 years.

The monthly repayments on the remaining 20 year P&I period are significantly higher than the repayments on a 30 year PPOR P&I loan, hence by lenders assessment criteria your proposed outgoings are higher and they will lend less on the I/O loan. It seems counter intuative to investors, but every lender assesses new I/O loans this way.

The article assumes the reverse of what lenders actually do.

 

[Rolf Latham]

I don't think that is what they are trying to say. I think they mean even with other collateral they suggest limiting exposures by requiring purchasers to put hard earned deposit in rather than equity. No idea how you would achieve this but this is what they mean.

and the point of that would be ?

that would be as productive as saying, sorry mate, I aint gonnna lend you for that business, save the cash, then you will fight harder before you go bankrupt.

if the gov wants to go that way, they should just buy all the CBA and telstra, QF and Virgin shares, and go back to regulate things properly.



ta

rolf

 

[ThomasAJ]

if the gov wants to go that way, they should just buy all the CBA and telstra, QF and Virgin shares, and go back to regulate things properly.

Wow forget property.

Just tell me with a few months notice when the Govt is gonna takeover (via sharemarket) and I'll give away my meager props and by said shares

 

[Peter_Tersteeg]

Wow forget property.

Just tell me with a few months notice when the Govt is gonna takeover (via sharemarket) and I'll give away my meager props and by said shares

Don't count on it. They'd legislate payment for the shares on their terms and the shares would be almost worthless. You'd be better off to go short.

 

[Marty McDonald]

and the point of that would be ?

To stop excess leverage in boom times. That's their thinking.