New bank regulations on I O loans and property portfolio investors.

Hi Pollyanna,

This is something that many investment focussed brokers are working on daily to assist clients from falling off a cliff with their effective cash flow.

The main issue itself isn’t so much interest only renewals – but that the lenders borrowing capacities for investors in the last 18 months have dropped significantly, so those who were previously approved with IO periods no longer qualify, so they cannot easily refinance with their existing lenders for a new IO period.

If you’ve only spoken with the big 4 banks re; IO extensions, it would be worth speaking with an investment focussed finance strategist who can look at your options. There’s a number of lenders who work specifically with investors in this space who have substantially higher borrowing capacity calculators which enable refinance and extension of IO periods beyond what you may be receiving.

In the end however it’s only possible to kick the can down the road so far, there is a point at which everyone will need to plan what their retirement strategy is – whether this is through debt reduction, partial sale to reduce debts, rolling over to P&I with a substantial cash flow to mitigate the repayments etc. Those in the 55-65 yr old space are the ones most likely to be affected by this, as lenders new servicing + age policies can trap people into P&I repayments which they were not factoring for 10+ years.

So long as you fit the overall potential lenders policies, there is likely potentially options for you to get a new 30 year loan with 5-10 years IO which will give you that last leg of breathing space to have further rental growth, debt erosion and potentially sell some down to give you a more effective cash flow position.

Refinancing may not be an option if the values have dropped. If the LVRs are still adequate it may be your best option however as you can start a new fresh IO term and also extend the total loan term to 30 years which will make the minimum PI payments lower when it does revert. but you will have to service to do this.

You should avoid cross in 99% of cases as there is no benefits to you.

But with 5 years to retirement you should avoid it even more. Get them uncross whenever possible.

Imagine you are nicely retired and decided to sell one property so as to get more expenses to live on. You find a buy and sell and after paying out the loan you will have say $200,000 cash which could fund your living expenses for the next 6 years.

Close to settle you send in the discharge of mortgage form. Your lender then asks you to fill in more forms – they then say, if you are not working you cannot afford to keep the other loans so the bank, to protect itself, will keep all that $200,000 and apply it to the other loans.

You now have nothing to live on (other than your other income) and have paid off investment debt.

I’ve had at least 3 people approach me as a lawyer to try to help them with these situations – but there is nothing that can be done when one property secures many loans. Each of these persons has had their retirements, and lives ruined.

One poor woman had about 3 or 4 properties and living on the rents which were low – about $20,0,000 per year. She didn’t qualify for the pension because of the asset base. She decided to sell one to get the proceeds to live on. She sold it and the bank took the lot. She now had even less to live on cause one rental income was gone. The loans were PI was paying down the remaining ones didn’t change the repayments per month but just left her with even less interest to claim, so the situation was actually worse.

Yes it is a legal requirement to disclose your assets and liabilities truthfully.

4. No it is not illegal. If fact it is the opposite. The lender has a duty of care to make sure they don’t lend to people who cannot afford a loan. If you are going to be over a certain age at some point during the loan term, often 75, then the bank will want to know what your exist strategy is – how are you going to repay a loan when you are not working. St George just updated their policy on this 2 days ago.

I feel either way the future for you is simple,

address exaclty the Net worth and Debt you have,

The structure of the loans and the limits of them.

The time frame for each exact loan as I am guessing you did not purchase them all at once (although you may have)

Now looking at what restructure options are avalaible (as stated above, your situation proves difficult)

Doing all of this ahead of crunch time to ensure you dont end up loosing more than needed, if anything at all.

Also points that may assist, Your Super fund if its self managed (MAY, MAY, MAY) be able to buy properties off yourself, clearing the debt and saving selling anything.

as to other options there could be many but your exact situation dictates so much.

feel free to email me if you would like assistance

Kind regards

Jaxon Avery

[email protected]

Simon D wrote:

Interesting topics. At broker’s advice, about 7 years ago, I take the portfolio loan from bank of melbourne (line of credit), interest only loan but without any time limit. However, the charge is that you have to pay higher interest rates. I am thinking how can I reduce the interest rate with bank without change the structure.

The only time you should use a portfolio loan is to access equity temporarily. Once it has been drawn down it would be best to convert the loan to a term loan interest only. Lower rate and less risk.