Hi i have been reading with interest a number of articles suggesting the financing of properties and even more worrying financing of lifestyles (ie drawing funds to live on against the increased value in a property).
With due respect to some of the aurthors of those articles (who might be professional investors and thus will be able to adjust their strategies appropriately), i think a number of people listening to such advice had better be careful.
In the last 15 odd years there as been an easing of credit conditions in australia. Remember the old days when a bank would not lend to you unless you had BOTH sufficient equity AND sufficient cash flow. Well the cycle could well start to move back to this situation again, especially with whats happening in the sub-prime lending markets. If the credit market tightens, then lenders will not be able to securitise their loans unless they 100% conforming, ie the loan applicant has both income and assets to support the loans. In such an event lenders may not be able to refinance their loans, regardless of equity because their income cannot support the size of the loan.
For those of you that are acquiring property solely on the basis of property asset revaluations, ask yourself, what will you do in such a situation? If you cannot refinance, then the banks will take reposession of your property. Even worse if this happens at a time when there are number of other people in a similar situation, you may be forced to dispose of your properties at depressed prices.
Just a word of warning.
chilliaa wrote:If you cannot refinance, then the banks will take reposession of your property.That is a huge step
. You are saying that if you cannot get a loan then you lose the property? Just like that?Reckon I would rather have this problem against a portfolio of property than be aiming at a old age pension with nothing.
The banks will take reposession if you cannot offord to refinance under the conditions of the market at the time of refinancing. Lets look at a few hypothetical situations if there is a credit crunch
Situation 1) Buyers of securitised asset products demand a 20% equity posession in a property otherwise they will not buy the paper
Situation 2) Buyers demand securisted asset products to have the loan applicants with debt servising ability of less than 25% of the repayment
Situation 3) If the two above siutations cannot be met then the interest rate must be 5% above government 10 year bonds.In any of these situations, if the borrower couldnt afford to do it, then the lender may take possession of the property.
If you read the financial press about RAMS this could already be happening. RAMS cannot find buyers for 5 billion dollars worth of securities debt. Without knowing the full details, RAMS say for example issued loans at an interest rate of risk free bond rate + 25 basis points. However the market has become more risk averse, so it is not interested. The 25 basis point premium is not enough to compensate for the risk. Now RAMS is in trouble, it either has to securitise those loans at a higher interest rate and suffer a huge investment loss or try to keep them somehow on their own balance sheet. What ever the situation, for future loans RAMS is going to have to increase the interest rate of new loans in order to offload them to investors.
Another situation is in the US now. Before you could get a lo doc loan for say 50 basis points above the 30 year government bond. I read one recent article that says that now you need to pay 400+ basis points above the bond yield.
For the last 15 years we have been experiencing an easement in credit terms. If the cyle starts to swing back to a credit tightening not just in terms of interest rates, but lending conditions, many inexperienced investors who have hedged against financing risk, will be exposed and burnt.
sorry typo, last paragraph should read ….. many inexperience investors who have NOT hedged against financing risk, will be exposed and burnt
Here is an part of an article from a link in propertyinvesting.com;s in the news:
http://www.news.com.au/heraldsun/story/0,21985,22247779-661,00.html?from=public_rss
The crisis in the markets for commercial paper and mortgage-backed securities is hurting non-bank lenders, many of whom have been passing on rate rises last week that are above the Reserve Bank's official 0.25 per cent rise.
RAMS last week increased the rate on its Interest Saver Home Loan by 0.28 per cent and leading non-conforming lender Bluestone has said it will hike rates on some mortgages by up to 0.8 per cent.
Last night market research firm Cannex reported that another leading non-bank lender, Aussie Home Loans, was hiking rates on investment home loans and premium mortgages by 0.32 per cent.
Heres another article from the australian:
http://www.theaustralian.news.com.au/story/0,25197,22240105-643,00.htmlLOW-DOC lender Bluestone has cited the US mortgage crisis as the reason for its move to hike lending rates by up to 0.8 per cent, predicting the nation's big four banks will have to do the same.
Bluestone is the first local home lender to lay direct blame on the sub-prime meltdown for a sharp increase in its funding costs, and then pass it on to borrowers.
The $3 billion lender told customers yesterday that interest rates on its products would increase in a range of 17-55 basis points, on top of last week's 25 basis-point rise in official rates announced by the Reserve Bank of Australia which would also be passed on. A half per cent rise is 50 basis points.
Bluestone's rates now range from 7.8 per cent at the lower end to 12 per cent at the top end for borrowers who are self-employed, have troubled credit histories or have high loan-to-valuation ratios.
Chief executive Alistair Jeffery said the nation's big lenders, including the Big Four, would also have to lift their rates, possibly outside the normal RBA cycle, due to escalating funding costs.
"I'd expect rates for existing customers to rise, because banks' cost of funding has risen and they will not want to risk their profit margins," he said.
However, before that, they were likely to act on their carded rates for new business, writing more loans at the standard variable rate rather than offering 70-80 basis-point discounts as part of so-called professional packages.
Mr Jeffery said he was "highly confident" the banks would review that practice.
Bluestone, with one quarter of its borrowers having prior credit problems, is in the same sub-prime segment in the US where lending excesses peaked in 2006.
However, the company's average loan-to-valuation ratio of 75 per cent is far less than the 90 per cent-plus average in the US.
Its shareholders, apart from Mr Jeffery, also include ABN AMRO and Barclays Bank, and it has $1 billion of committed term funding.
Last April, Bluestone cleared its Australian lines with an $800 million securitisation that leaves it with spare funding capacity as the US fallout hits these shores.
Mr Jeffery said Bluestone had lifted its rates after guidance from its bankers on its likely cost of future funding.
"It presumes current conditions continue and the markets are open for business, but the spreads for our bonds are wider in a distorted credit environment where the supply and demand balance is upset," he said.
"We have a lot of warehouse capacity, and we don't rely on the short-term commercial paper market, which is where the impact of the liquidity stresses are being felt," Mr Jeffery said, adding there was no question of "profiteering". The rate rises, he said, were an accurate reflection of the lender's higher cost of funding.
In an update to customers, Bluestone said the arrears and loss levels of sub-prime loans, particularly the 2005 and 2006 vintages in the US, had been increasing sharply, and this had "spooked" the markets.
There were current estimates of $US100-$US175 billion of total losses, unnerving credit markets because it wasn't yet clear where those losses would emerge.
"It is highly likely that more bad news will flow from the US sub-prime sector in the weeks and months to come, as the losses are crystallised," Bluestone said.
Unconfirmed reports also began to emerge yesterday that other small, local lenders had lifted their home-lending rates by more than the 25 basis-point RBA hike.
This would also suggest they were feeling the heat from higher funding costs.
. You are saying that if you cannot get a loan then you lose the property? Just like that?You must be logged in to reply to this topic. If you don't have an account, you can register here.
