interest only

[casacamo]

We have had a IP on interest only fixed rate for 3 yrs
The loan is set to roll over next month.
We would like to continue with interest only for another 3 yrs, problem is: bank says maximum interest only period is 5 yrs. then it must convert to P&I. which will make it negative cash flow.

This was not explained to me at the time of taking out the loan.

Is it time to change banks. All our loans are thru the same lender B*Z. Do they all have this policy.
Our o/all LVR is low (approx 30%) so I can't understand what their problem is.

Any comments would be appreciated
thanks
casacamo

[xris]

Hello Cas,

Tell them no and that if they refuse to do it you will take your business elsewhere next month. They will probably back down.

Most banks in my experience have this or a similar rule, but they all also have a lot of flexibility in how they apply the rule, or otherwise.

You may simply have been told this by a junior who does not have the authority or ability to think outside the square.

xris

[whitt]

Ditto Xris statements.

Jusy ask them to go back onto IO.

[Dean@Massiveaction]

hi Casacoma. All banks will tell you you have to go to P&I but in reality when you actually roll the loan you just tell them you want interest only and they generally do as you ask. However you are breaking a basic rule of spreading your risk by having all your loans with one bank. As their exposure is higher they may well say no. Strongly urge you to get every property with a different bank ASAP. BNZ will probably say no to rolling over the I/O if they are into you for more than a million bucks.

[RentMaster]

Maybe contact a mortgage broker. They know what the banks will and will not allow. If you have a very low LVR then leaving with one bank should not be too much of a problem. Just use a different bank with the next one. But a mortgage broker might be able to negotiate a good deal with someone to swap all your business elsewhere.

[McDuck]

It might be all due to the initial concept behind interest only loans.

The subject has really got me fascinated.

If you are optimistic, the idea could have been to allow first time home buyers a little breathing space to buy appliances and furniture etc.

If you are cynical, the idea could be akin to a drug pusher offering free samples to get someone hooked.

The main point is that banks live forever and people don’t.
To wait fifty years for a payback is no problem for a bank (as long as inflation is allowed for).
A person suffers from that little limitation known as death.
Cheer up…at least we don’t have the same life span as pets.

Now the really funny part comes if you consider a Trust.

Like a Bank, a Trust can also theoretically live forever.
So if a trust borrows “interest only” form a bank…
The principal may never be paid back.

Then again…when you live forever…interest and inflation rules… and piffling amounts like principal become insignificant.

[4thecat]

I worked as a Mortgage broker in " my last life "
This is all good advise ! There are heaps of banks and lenders out there and the " bum fight" for new business is just about to warm up. You won’t have a problem to find someone to give you an interest only loan out there.

[Propoholic]

I've always had interest only loans and received the reoccuring comunications from lenders advising they are going to put me on P&I, when the five years is up.

I thought I had a good relationship with National from early 1996 through to late 2004. In later years I received increasing communications highlighting they were going to put me onto P&I. I advised I would not be paying for principal reduction however they proceeded with changing loans to P&I. I refinanced all their loans over a 12 month period and they immediately started offering me interest only finance. They still phone me regarding their latest interest only options.

I always remember Martin Hawes comparing lenders with cabbage sellers on the side of the road, "if they dont move the cabbages they go bust." The service of cabbage sellers changes on a weekly basis, move onto the next cabbage seller.

I have always found their cries for principal reduction tends to track the property cycle. In the good times they hand barrow loads of int only finance out, when things tighten up they get their hands smacked (for bad performing loans) and advise "we are limiting int only to two years" etc.

It all goes around like a scratchy record,...I mean CD.

[McDuck]

I worked as a Mortgage broker in " my last life "
There are heaps of banks and lenders out there and the " bum fight" for new business is just about to warm up. .

did you mean Bun fight..or do you really hate banks?

[casacamo]

thanks for all your good advice guys, I'll make some enquiries with a morgage broker.

Conveinently BNZ have just changed their fixed rates and now the 2 yr fixed is the cheapest option - hence no
problem with IO as it will take us to 5yrs anyway, but will interesting to see what a broker can do 4 us

The basic premise was to have all our IP's on IO & private home on P&I so to maximise repayment of our own home morg. quicker.
Eventually we will sell up the IP's to fund our retirement in which case the loans will be repaid in full (over the next 10-20 yrs)

[xris]

Like a Bank, a Trust can also theoretically live forever.

Mr IRD: Hello Mr investor. So these investment properties you are now selling, why do you think you should not pay tax on the capital gain?

Mr Investor: Because sir, I bought them a while ago as a nest egg for my retirement and not with the intention of making a profit. I am now about to retire and I want to free up some capital to help fund that retirement. If they have gone up since I bought them then that is an unintended, but nevertheless pleasing, bonus.

Mr IRD: But according to the title deeds you do not own these properties; they are all owned by trusts and LAQC’s.

Mr Investor: Yes, they always have been, to maximise tax benefits and to offer some asset protection. It has been a common practice for quite a while now amongst investors.

Mr IRD: Spare my the lecture please. Neither a trust nor an LAQC grows old so they cannot buy properties with the intention of funding their retirement. There will be a bill sent out for CGT.

Have I missed something?

xris

[roseneath_rat]

Mr Investor : Oh no sir these were not purchased to fund my retirement, these properties were bought by my family trust in order to provide a legacy for my family including my children & my children's children. Otherwise I would gladly pay more tax that I need to.

[McDuck]

Yea tax is a bummer.
But what can you do.
Move to Monaco ?

I was just really trying to give another perspective on why a bank would rather have you signed up for a loan repayment agreement that forced you to repay a part of the capital every month.

Because if you think about it… that’s not smart for the bank to do that.
The bank gets more from you the longer it takes you to pay off the capital.
“Interest only” loans are more profitable for the bank.
Do the math yourself.

It’s like a credit card company.
The “deadbeats” (as they call them) are the customers who aren’t in much debt…therefore return less profit to the credit company.

Most likely the real reason is that managers are forced to show immediate financial progress .

And really shooting off to a sidetrack now…that’s why frustrated CEO’s are drifting toward privately owned corporate structures these days.
They are not bound by the need to show quick returns.

[cube]

Couple of points.

A single Trust doesn't last for ever (I think the limit is 80 years, at which time the Trustees have to do what is best for the beneficiaries in line with the settlor's wishes).

In line with the obligation to act in the beneficiaries best interests, can the Trustees (the 'parents') sell the house so that they can afford resthome care instead of going to live with the children (the beneficiaries) - Sounds like it would be in the kids best interest to me!

However, on the point of having a property on interest only for 20+ years before retirement. If you didn't buy to make a profit, how exactly were you going to fund retirement?

cube

[matt004]

Casacamo

I purchased one of my IP in 1996 and put on IO. I rolled this over twice, 1st time was 5y year then 3 year fixed periods before bank wanted a P & I. I have since refinanced as I have left that particular bank for other reasons. I had no trouble getting IO from other lenders.

Anyway, I have now owned this IP since 1996 and have had the same tenants in there since this time. I have been thinking if I sold for some reason now I would still owe my orig price wheras as it has become one of my long term IP, if I had it on P & I from day one then there would be 10 years of P & I deducted from the purchase amount.
Doing a rough sum on this and if I had on P & I from day one, if the tenants still stay there for another 10 years the prop will be would be completely paid off on a P & I thus achieving my goal of future passive income on no mortgage. If I sold in 10 years time on IO i still owe the orig purchase price.

I guess what I am saying is depending on your goals and what you want to achieve a P & I may not be to bad for you if you plan to hold that property for long term. There are plenty of topics on this already. I always put my IP on IO so to use the additional cashflow but this one made me think whether I may of been better on a P & I. Mind you,10 years of the same tenants has been a massive advantage.