IO Investors forced to sell – Miriam Sandkuhler

APRA continue to tighten the lending to investors with a direction to banks to cut back on interest only loans.  Miriam Sandkuhler discusses the likely impact on investors and the market.
APRA are continuing to tighten some of the rules around borrowing money, particularly for investors. We’ve seen recently moves by APRA to get the banks to reduce their books in terms of interest-only loans. And many, many loans, of course, are interest-only. So, what does that mean? What’s going to happen to the landscape? Miriam Sandkuhler from Property Mavens has been looking at this, and she joins me.
Good day, Miriam. How are you doing?
Miriam:  I’m good, Kevin. How are you?
Kevin:  Good. Give me the stats behind this, because I know you’re on top of this. How is the landscape changing?
Miriam:  A while back, there was a senate committee hearing, and they discovered that Westpac at the time had 50% of their loans made up of interest-only loans on their books. This resulted in APRA coming back to the industry saying “Right, you’ve got to reduce it.” I think most lenders now have to have not more than 30% loans on their books that are interest-only.
So, what’s going to happen as a result – and this recently happened to me – is that people who are coming up to the end of their interest-only period will be either forced to convert to principal and interest, which means there’s an additional financial outlay on them, or they’ll have to go re-finance elsewhere.
But where they can’t re-finance, they’re going to have to determine whether or not they can carry that extra repayment that they’re going to have to cash flow
Kevin:  Yes, it could also lead to cocktails, as well, couldn’t it – people having to get a couple of loans just to effectively tie them over?
Miriam:  That’s right. And whether or not they have the capacity to do that and the lenders will let them do it is a whole other thing. But worse than that, they’ll be owner-occupiers in this position, and particularly with predatory lending a number of years ago, there’ll be people back then who wouldn’t qualify for a loan today, and they probably won’t be able to service any extra repayments. So, they actually may in fact be forced to sell their home, as may investors who might have multiple negatively geared properties in their portfolio where they have to do the same.
Kevin:  Yes, the last thing we’d want to see is a glut of those sorts of properties on the market. It’s not going to do much for market conditions. I’m actually surprised by those figures, Miriam, when you talk about Westpac and their bank being 50% made up of interest-only loans. Is that all borrowings, or is that investor only?
Miriam:  No, that was their whole lending portfolio at the time.
Kevin:  That’s staggering, isn’t it – that that many people would be thinking to do interest-only loans?
Miriam:  Well, I think for a lot of people and the lending industry, it was easy to convince people to take on the debt. But as a result, APRA is now forcing the banks to reduce the number and value of interest-only loans on their books.
Yes, potentially, it could trigger a U.S.-style housing meltdown. Not in the terms of people handing in their keys and walking away, because they can’t do that in this country. But a lot of people coming up going “I can’t hold this property, I have to sell it.”
And again, someone who doesn’t have a balanced portfolio – let’s say they’ve only got negatively geared properties, so they don’t have a mixture of negatively geared and positively geared – if they have to start offloading properties, they want to look at that now, sooner rather than later, because they don’t want to do it when there’s a glut of the same property type on the market.
And as you and I know, things like house-and-land packages and apartments in some instances, there’s already a glut. So, the last thing they want to do is have a distress sale among the glut of the same property type that they need to get rid of.
Kevin:  I don’t know whether you can answer this question, Miriam, but would the banks be in a position where they could actually force someone to move from interest-only to principal and interest if they’re mid-way through their loan term? Or does that have to be at the end of the loan term?
Miriam:  My understanding is it needs to wait for the interest-only period to conclude, and then you either pay the extra P&I payments or you try and re-finance elsewhere. So, either of those scenarios will take place.
Kevin:  Interesting. We’ll watch what happens with this. Miriam, thank you so much for your time. Miriam Sandkuhler is from Property Mavens. Thanks, Miriam.
Miriam:  You’re welcome, Kevin.

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