Header Ad Module

Collapse

Announcement

Collapse
No announcement yet.

100%+ finance deals leave investors exposed

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts

  • 100%+ finance deals leave investors exposed

    100%+ finance deals leave investors exposed
    BY ROB STOCK - Sunday Star Times | Sunday, 29 July 2007

    Some property investors are borrowing from 100% to 110% of the price of investment properties in pursuit of capital growth on interest-only loans.

    Russell Benshaw of Key2, a property investment company, says so keen are some people without ready cash to invest to get on to the investment property ladder, they are not only going for 100% financing, but are capitalising their set-up costs, which in some cases amount to 5-10% of the cost of the property.

    That, he said, left people in negative equity from the very start, and at risk of wobbles in the property market.

    Benshaw said: "We see deals being done by rivals where investors are borrowing over 100% of the price of the property, well over, in some of those deals as much as 105-110%. It's getting into dramatic negative equity, especially in this environment."

    Eighty per cent of the loan might be secured against the investment property, with the remaining 20-30% secured against equity in the family home.

    While that's risky in itself, Benshaw says he's seen deals where property spruikers are gouging out $45,000 in fees for selling apartments priced at around $250,000 in rural towns to city folk. That means not only are some people voluntarily going into negative equity with the promise of future capital growth, but that they are unwittingly exacerbating the situation by paying too much. Many could ride out their negative equity eventually, but could struggle to stay in the market.

    Property author Peter Aranyi warns that naive investors do not realise how precarious their finances are. Many have interest-only mortgages, as the rents they receive make it impossible to fund a traditional table mortgage, and they think, or have been led to believe, that they have the right to continue that kind of loan indefinitely.

    The reality is, banks can require interest-only loans to be converted to traditional table home loans at any time, and at the very least, such loans are reviewed every three years.

    If an investor's bank gets nervous, or head office decides it's time to reduce exposure to investment properties, that will be exactly what happens, and investors could suddenly find themselves unable to make mortgage payments and be forced into fire sales, or if they can't manage a quick flick, a mortgagee sale.

    "Too few investors have been through a downturn or seen the steely look in a banker's eye when they say no more, after getting that memo from Sydney," says Aranyi. He recalls 1995, when some banks got nervous and required investors to reduce the loan to value ratios on their loans. They gave investors 30 days to do so, says Aranyi. "Lenders are your best friends until the bubble bursts, and then they will play hard ball with you," he says.

    Kieran Trass of the Hybrid Group warns investors to spread loans over more than one lender in case one suddenly turns nasty.

    http://www.stuff.co.nz/sundaystartim...4602a6445.html
    "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx

  • #2
    The reality is, banks can require interest-only loans to be converted to traditional table home loans at any time, and at the very least, such loans are reviewed every three years.
    This statement interested me - how many people are aware of this, especially those that are relatively new to property? I don't remember hearing this before, or remembering the mortgage broker pointing it out to me when I took out the mortgages. I think I need to go back and read the fine print!

    I still think you are still better off financing at 100% IF you are paying off a mortgage on your own home (for tax deductibility reasons). Do others agree? Or am I deluding myself?

    It certainly highlights the fact that you need to be very careful when looking at your debt servicing capability, and be sure to factor in the 'what if' scenarios.

    Have others been caught out on this with their banks? Are do people usually manage to extend their IO terms?

    Kieran Trass of the Hybrid Group warns investors to spread loans over more than one lender in case one suddenly turns nasty.
    Fortunately, I DO remember hearing this advice - and heeded it!
    Lisa

    Comment


    • #3
      I was speaking to a lady from NZHL on Friday , and was told that they would offer 5 years IO.

      I still think that you have to look at long term(for B&H)though, have cashflow and plenty of equity,to help ride out any hard times, and keep your eye on your end goal.

      Comment


      • #4
        Yes, I realise that banks will offer up to 5 years IO (I have IO with NZHL, ASB and Sovereign), but what happens when the 5 years is up? I understand from the article, that the banks could then switch you over to P&I.

        This could potentially make the serviceability for many people very difficult if they had planned on rolling over to another IO term.
        Lisa

        Comment


        • #5
          Originally posted by BusyLizzy View Post
          Yes, I realise that banks will offer up to 5 years IO (I have IO with NZHL, ASB and Sovereign), but what happens when the 5 years is up? I understand from the article, that the banks could then switch you over to P&I.

          This could potentially make the serviceability for many people very difficult if they had planned on rolling over to another IO term.
          If the bank wants to convert to P&I after 5 years on IO, then the usual course of action would be to 'shop around' for another lender who will - that would normally be enough to bring the current lender to heel....

          cube
          DFTBA

          Comment


          • #6
            There's a lot of things the banks "can do" when you read the fine print. However it rarely happens and as Cube points out you can simply move banks. The only time I know of the banks behaving like this was after the stockmarket crash.

            Comment


            • #7
              I agree with pooombah on this.

              I once had a bank wanting to see some capital repaid. Less hassle, and less expense, than creating a stink and shifting banks was simply to put my smallest loan on P&I. Everyone happy.

              Also it should not be forgotten that paying bank capital does have advantages. Many people swear by P&I. It's not as though it is dead money.

              But if you are highly geared and have little history to back you up then you may need to think about plan B just in case the bank starts getting nervous.

              xris

              Comment


              • #8
                Aranyi. He recalls 1995, when some banks got nervous and required investors to reduce the loan to value ratios on their loans. They gave investors 30 days to do so, says Aranyi. "Lenders are your best friends until the bubble bursts, and then they will play hard ball with you," he says.
                Does anyone here remember this happening, has anyone been through this sort of call up?

                Comment


                • #9
                  banks in the united states

                  There have a number of examples over that last few months of banks and finance organizations who have lent up to and over 100% of the sale price of property either go bust or file for Chapter 11 protection. I am sure that many of the people who financed through these companies are now having the loans called in. This has lead to the third consecutive fall in the US housing market and we are also seeing record forclosures of property now taking place. We may not be imune from these trends.

                  Comment


                  • #10
                    Originally posted by pooomba View Post
                    There's a lot of things the banks "can do" when you read the fine print. However it rarely happens and as Cube points out you can simply move banks. The only time I know of the banks behaving like this was after the stockmarket crash.
                    Banks can certainly do as they please in a severe slump which is a possibility. However for once I agree with your point in that this is very unlikely, there is way too much competition out there in the banking sector for this to happen again like it did in the early 90s.

                    I could see the current government selling investors down the tube but not the competitive banking sector, there would be too much to lose.

                    Comment


                    • #11
                      I have been in the position of the bank asking for some repayment all I did was ask for another month to prove myself as i had deals in the pipeline (which I didnt of course) went out and bought something and sold it and repaid some of what they wanted, everyone happy.

                      It is understandable they have boxes to tick and I guess if you have too much out on IO they start to want to see some repayment.

                      Havent had that happen for a long time though but I guess I am regularly repaying what I borrow now a days then borrowing more again.

                      All good fun.

                      Comment

                      Working...
                      X