Interest-only loans a matter of no principal
Adam Creighton
The Australian 12:00am March 17, 2017
Negative Gearing is a perverse Government incentive to PUMP and DUMP property so the wealthy can gain even more riches. But those who took out INTEREST ONLY LOANS will lose every asset and spend the rest of lives in POVERTY – guaranteed! Here is why.
Families and sellers of bank mortgage products were lied to BY THE BANKS as to LOW DOC Loans as the best product for them. Victims were spruiked and did not ask for these loans. They were sold the loans as being 'ordinary mortgages' needing less docs. NO MENTION was made to BDMs or Sellers of the words INTEREST ONLY. This is critically THE FRAUD.
Most loans in Australia: $1.6 Trillion worth..................were being sold as LOW DOCS. There is no such thing as an IO Loan that is not a Low Doc. Its just that people were not warned these Low Docs were in fact, Interest Only!!! That is the SCANDAL FOR AUSTRALIAN BANKS. The 30 year Loans were in fact intentionally created to implode within 5 years and ASIC and APRA knew that to be true!
The regulators now ask why it is that so many families CHOSE to ask for Interest Only mortgages?
BFCSA has the empirical evidence: NO-ONE asked for IO loans. They were sold Low Docs as
mortgages and NO MENTION was made that these loans were not P & I. Simple explanation is the
families DID NOT KNOW and the BANKS intended the deception to continue for a decade.
The Mortgage Package included $30,000 credit cards (and more) that were secured over the home.
THE PROOF: When I ask each member as they join BFCSA, the Q: "Did you know these loans are like
the old bridging loans and can never ever be paid off??"
Shock sets in and I can tell the first time members have no idea about the loans being interest only and
are flabbergasted when they realise what consequences are in store!!
www.theaustralian.com.au/business/opinion/adam-creighton/inte…
Forget meat pies, XXXX beers and lamingtons. Interest-only housing loans are the dinky-di emblem of 21st century Australia.
These are loans where borrowers don’t have to start paying back the principal at least for five or 10 years — or never, if buyers can sell with a capital gain.
For the past six years more than half of new housing investor loans issued have been interest-only, a share that is rising towards 60 per cent.
Over the same period, the share of even new owner-occupier loans that are interest-only has increased, from about a fifth to a quarter.
Just think: swathes of working families not choosing to pay off the “family home”, the most sacred of assets.
These are rising shares of a rising flow too: total home loans in Australia rose 6.5 per cent to $1.64 trillion over the course of 2016.
The infamous low-doc loans that plagued the US financial system aren’t a problem in Australia BULLSHIT!!!
Only $1.5 billion of those were written last year. But more than $137 billion worth of interest-only loans were granted, according to the latest APRA data.
More than 40 per cent of Westpac’s outstanding mortgages, more than $390bn, were interest-only mid-last year.
ASIC did a survey of 11 lenders in 2015 and found demand for interest-only loans had grown by about 80 per cent since 2012.
Interest-only loans aren’t proliferating overseas. In Singapore and Canada they are rare or not allowed. In New Zealand, 28 per cent of outstanding home loans were interest-only in December.
In Ireland, chastened by its housing experience over the past decade, such loans make up less than 10 per cent of residential loans, according to the IMF.
In Britain, only 14 per cent of new residential mortgage loans were for investment properties, known as “buy to let” there, compared to about 40 per cent in Australia.
Meanwhile, the flow of new mortgages that are interest-only was 19 per cent in December. They are hard to obtain in Nordic countries, too, except for Sweden.
Why are they so popular here? Interest-only loans leave borrowers with lower repayments, making larger loans more affordable.
They generate interest income that can be deducted from other wage and salary income.
They are the perfect choice for maximising tax deductions and buying power.
They are also great for lenders, which can make bigger loans to more people. The profit margins are huge.
After all, banks can leverage a dollar of their equity 50 times when lending for housing, the remainder funded by deposits that can cost very little.
But their prevalence might not be so great for everyone else. Unhinged house and credit dynamics can wreck economies.
Investors appear to be planning to sell their investments before their loans flick to normal and repayments jump. And they can jump a lot, especially in a low-interest rate environment.
“A customer going from interest-only to principal and interest at rates of 4 per cent is expected to increase their repayments by almost 60 per cent compared with a 20 per cent increase when borrowing rates were 7 per cent,” said Macquarie Bank analysts in recent research.
The Reserve Bank has noted many times how interest-only loans are slower to be paid off, which increases the risk that borrowers move into “negative equity” if house prices fall. They haven’t for some time, but a lot can change in five years.
Elevated consumption of interest-only loans, like pies and beer, isn’t healthy.
Banks and investors are bracing for more “macroprudential regulation”. Regulators should consider requiring borrowers to make at least some effort to repay their loans, as other jurisdictions have done. Loans are meant to be paid back.
Even John Symond of Aussie Home Loans called for restrictions on interest-only loans in 2013. Cries of “leave the free market alone” are rubbish given the financial system is ultimately propped up by government, and enjoys a massive implicit subsidy that dwarfs anything received by other industries.
So-called “tail risk” is borne not by the banks or borrowers but by the debt-free taxpayers whose incomes can be dragooned into bailing out a dysfunctional system.
Indeed, what’s fascinating about prudential regulation is how seemingly obscure regulations on loan type and assessment requirements, which can run to hundreds of pages, can have such far-reaching effects on house prices and broader economic outcomes.
Those Macquarie analysts also found people on $105,000 a year could borrow $985,000 from Commonwealth Bank for an investor loan, more than any other eight banks canvassed. The average across all banks was still an eye-popping $813,000.
These levels seem extraordinarily generous. Such a borrower would ordinarily owe about $28,000 in income tax yet would need to pay about $53,000 in interest — at current rates — on the loan excluding any principal repayments, which leaves not much for living expenses.
Thank God for negative gearing! It’s a shame people invest so much for tax reasons rather than weighing the inherent worth of investments. But it’s perfectly rational; they are only responding to government incentive, however perverse.