positive cashflow mortgage…a smart option?

This product, or a similar version of it, has been widely used in the USA since I’ve been here. It is, in my opinion, a very dangerous product. Many people here took these loans because they couldn’t afford to buy using traditional, safe options.

Some took them to take advantage of the booming market here in L.A; which ended about a year ago. Now there are many thousands of people who are locked into loans where they owe more than their house is worth, and they can’t re-finance as they won’t qualify for other loans.

As it stands now, there are many sub-prime lenders (lenders who loan to those who struggle to qualify for traditional loans) going bankrupt (along with their clients) here in the USA . As the housing market has contracted, the loan period has ended and the clients need to refinance and can’t, and the houses are worth less than they paid, so they are forced to sell at big losses.

As the link says, you pay part of the interest now, and the rest gets tacked onto the loan as you go.

You are relying on the property to go up in value over time to eventually create the equity.

Pros;
good cashflow in short term
possible pos cashflow while intro rates are low.
allows you to secure a property and refinance later as finances permit.

Cons;
property may not go up in value as you expect.
property may go down in value, leaving you with neg equity if you need to sell
neg equity in short term could be disastrous should you need to sell for any reason.

Are you 100% sure your property will go up in value by more than the interest tacked onto the loan over the honeymoon period? Are you sure you will have enough income/cashflow to start paying principal PLUS extra interest at the end of 5 years?

This question asks;
“Q. I understand there is no offset account, however I could put back more into the loan and hence creating a line of credit or I can reduce the principal. Is there a fee for this? Is there a max limit?
A. Extra payments up to 50% of original loan permitted within 5 years. The client has the ability to redraw the additional repayments with 2 Free redraws per month (min $500).

I think the reality is people take these loans because they are struggling with cashflow, so paying off more than the repayments allow is probably unrealistic.

Cheers,
Marc.
[email protected]

“we get sent lemons; it’s up to us to make lemonade”

Most people do not udnerstand these sorts of loans. It basically is just capitalising part of the interest. ie you only pay part now, and the rest is added to the loan. So unless you have high growth, then you will be going backwards.

There is also a risk the ATO could disallow the interest deduction on the capitalised component.

Terryw
Discover Home Loans
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P_retired.

The LOC Probably would be cheaper, but not many go to 90% LVR.

Another option would be to borrow 90% IO and put 10% in an offset account with the repayments coming from this.

Terryw
Discover Home Loans
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