Limits on IO loans!?

[GenY]

Just read John Bolton's piece in NZ Property Investor mag. He suggests the RBNZ could implement a time limit on IO loans....

[Orkibi]

Which month is that GenY? Most IO already 5-10 years...

[Learning]

My IO's have all been limited to 5 years. At the end of the term I pay them off with a new one. But I guess that's the issue.

[Orkibi]

Some of mine are up to 15 years

[GenY]

Which month is that GenY? Most IO already 5-10 years...

Hi Orkibi,
The latest issue
He suggests that the RBNZ could make a policy to the banks that IO loans could only be used for hardship or banks can only have a percentage of loans on IO - like the LVRs. He used an example of a house in Auckland and how cashflow would be severely affected if IO limits were brought in and how it could cool down the Auckland market.
First time I have heard this suggestion.

[Orkibi]

I doubt it's going to happen... but it will be bad news if it does!

[orion]

I doubt it's going to happen... but it will be bad news if it does!

Would have to be the most sensible suggestion I've heard from the government/reserve bank in a long time.

How many of you guys have your own home on I/O? I would think very few if none.
So why would you have all your investment property loans on I/O? Because you keep thinking the prices will increase, or you really can't afford to buy it, so only pay the interest on it?

[Orkibi]

There are many investors who invest and borrow P&I (Like yourself Orion) and it is great if you can afford it by having a 10%+ yield or putting money in to it.
but unfortunately in Auckland the yield are not sufficiently high to get the numbers to work.

All my AKL properties are above 7%-8% gross yield and are on IO, they would have cost to much to hold on P&I.
with IO they hold themselves, i pay capital down as i have available.

So why would you have all your investment property loans on I/O? Because you keep thinking the prices will increase, or you really can't afford to buy it, so only pay the interest on it?

Although im allways buying Buy&Hold on yields that the properties hold themselves (in Auckland) im much better off putting say Maximum 10% cash in the deal and hold the appreciating asset on IP.

Each to there own, but for me topping up the shortfall in AKL is not good use of my money.

[GenY]

From interest.co.nz
In their weekly economic note released later in the day, ANZ's economists said additional macro-prudential measures from the RBNZ at some stage look "highly likely in our view and will probably fit into three broad options":

1. forcing banks to hold more capital against residential property investor loans;
2. introducing specific LVR restrictions for residential investor property loans;
3. or introducing debt servicing or debt-to-income type restrictions that have been introduced in other countries. "We’d look at capping the amount of interest-only borrowing too."

[donthatetheplayer]

So why would you have all your investment property loans on I/O? Because you keep thinking the prices will increase, or you really can't afford to buy it, so only pay the interest on it?

It's good tax planning. Pay off your own home first. Once that is done start to pay off principle on IP's. It is very bad tax planning to pay principle on IP's before you have your PPOR paid off in full. The expectation of house price increases has nothing to do with the decision.

In the long run I expect to have no mortgages because I will have paid them all off through my income plus rental income. There's a smart and not-so-smart way to get to this point though.

[orion]

It's good tax planning. Pay off your own home first. Once that is done start to pay off principle on IP's. It is very bad tax planning to pay principle on IP's before you have your PPOR paid off in full. The expectation of house price increases has nothing to do with the decision.

In the long run I expect to have no mortgages because I will have paid them all off through my income plus rental income. There's a smart and not-so-smart way to get to this point though.

Might be a good intention Don, but yet to see many people at all actually do it.
Maybe you will be the 1 in a 1,000 people who is

It's more about just that though which I've mentioned in several other threads.

[donthatetheplayer]

Maybe you will be the 1 in a 1,000 people who is

Here's hoping! I've got 30 years until I... don't get the pension so a bit of time up my sleeve with a very slow and steady approach. Right now it would take me about 10-15 years to pay off all loans from my day job income (excluding any payments from income from +ve geared properties).

I guess the equation will change if I keep buying properties. Right now if I had no loans I'd get a rental property income of $70k p.a. I think double this amount will be about right for my lifestyle needs. That's why I'm really only wanting to buy +ve geared from now on - so it's achievable to pay off all loans without having to sell anything. Too much hard work finding the right place to buy to turn around and sell it!! I'm also diversifying passive income streams outside of property (yes, shares) which I have to admit is boring as hell! I do like the payment notices that come in the mail though..

[PTILoveYou]

Most banks you can re-apply for another 5 year IO anyways, and even extend the term of the loan.

Placing a limit on IO period won't affect the market at all.

People will still speculate to invest or buy their first homes.

[speights boy]

It's good tax planning.
Pay off your own home first.
Once that is done start to pay off principle on IP's.
It is very bad tax planning to pay principle on IP's before you have your PPOR paid off in full.

Inaction on housing shows end is in sight

We're told there is no such thing as a silver bullet for this problem, but there might be.

The Budget could do something truly daring and probably effective.

It could stop tax deductions for interest paid on mortgages for residential property.

The outcry from investors would be immense - they'd probably find this one even more fearful than capital gains tax.

But politicians would find it easier to answer, for the mortgage interest deduction is grossly unfair.
Only owners of rental property can claim it.
People paying for a mortgage on the house they live in cannot deduct their interest payments from the tax on their personal income.

And the unfairness does not end there.
Interest deductibility gives investors an advantage at auctions against first-home seekers.
It lowers the cost of capital for investors, allowing them to borrow more and bid higher.

How is that fair?

I don't have high hopes for the Budget.
If the Government was getting serious about the housing market at last, we would have had a hint by now.

Instead, we had another sideshow with the Auckland Council this week over the supply of services to outer subdivisions.

Unless we are in for surprise, the end is in sight for the Government's natural life.

http://www.nzherald.co.nz/opinion/news/article.cfm?c_id=466&objectid=11445580

[soundslegit]

Forcing principal payments is good. Stops stupid buying when things go bad.