Interest Only Loan

[WebBoard]

From: Mike .


The 5 year crunch - how do we best avoid it?
From: Les
Date: 10/26/99
Time: 11:18:20 PM

G'day all,

Something that hasn't (yet) affected me, (but the figures screamed out at me while doing forward projections), is the "crunch" that occurs around the end of the fifth year of owning investment properties. The major players are: Depreciation (fittings, etc) is now GONE Borrowing costs, the same (even earlier?) Rents haven't caught up majorly, and, the killer, if using the "5 yr IO, then P&I for 25 years" formula, that is when the mortgage repayments LEAP up by another $50 - $100 per week.

Now, none of this needs to be too drastic, but what if our "start" in Investment Property was to buy 2, or 3, properties right up front !!! That could HURT !!!!!

Possibly, it's simply a matter of timing other purchases to produce a new, positive cash flow to offset (or match?) the sudden negative flow caused by the "crunch".

Who's "been there, done that" and can give us all a bit of good advice (including any associated traps, etc.)

Hoping (or I'm in trouble in a couple of years ;^)

Les

 

[WebBoard]

Mitch

Reply: 1
From: Mike .


Re: The 5 year crunch - how do we best avoid it?
From: Mitch
Date: 10/27/99
Time: 11:36:34 AM

Les

I'm not sure why you would change from IO loan to P&I loan after 5 years. I'm guessing that you are on a fixed interest loan for the 5 years up-front, which reverts after that.

If you are forced to do that by your current lender then you may be able to refinance to a Line of Credit arrangement where that is not inevitable. Perhaps I've missed something, but I'm financed that way with the NAB (not a plug for them). If you've got enough stuff with them, they will also reduce the variable rate loans by 0.5% across the board, and additional loans do not attract additional costs (except stamp duty).

 

[WebBoard]

Les

Reply: 1.1
From: Mike .


Re: The 5 year crunch - how do we best avoid it?
From: Les
Date: 10/27/99
Time: 12:12:38 PM

Interesting comments, Mitch - do you happen to have any idea re "how much" you need to have with them - that 0.5% drop sounds GOOD to me.

Re "why would I go P&I" - this is just the way two of my early loans are set up (adviser-based), and it fits well with some people (not necessarily me, so I could end up changing mine). Jan mentions in her book going P&I if you "can't sleep nights with IO", but suggests doing 5 years Fixed or IO first. So this scenario could well apply to others too - hence my question.

Thanks for your response,

Les

 

[WebBoard]

Mitch

Reply: 1.1.1
From: Mike .


Re: The 5 year crunch - how do we best avoid it?
From: Mitch
Date: 10/31/99
Time: 3:39:15 PM

NAB have a package which they call their 'Professionals Choice'. I was put onto it by a lawyer when I changed jobs about 3 years ago. I'm still on it, and it has allowed me to access equity from my home to finance investment without any costs other than stamp duty. The package comes with the 0.5% decrease on the NAB published variable rate. Follow up with NAB ....things may have changed since I took out my loan with them 2 years ago.

 

[WebBoard]

Boyd

Reply: 1.1.1.1
From: Mike .


Re: The 5 year crunch - how do we best avoid it?
From: Boyd
Date: 10/28/99
Time: 11:25:16 PM

G'day Les,

Sounds like an interesting problem. I can see where you're coming from, particularly if it happens with a few properties at once. I would think the answer may be two fold. Firstly (and quite obviously) spread your loans out so they don't all mature at the same time and secondly, why not just refinance to a different lender at the 5 year mark and start another 5 year term of IO? I may be looking at this in too simple a manner, but that's what I would do if I was in that position.

Having read all of your earlier e-mails, I'm curious as to what your profession is. I always get something good out of your responses.

Regards, Boyd.

 

[WebBoard]

Les

Reply: 1.1.1.1.1
From: Mike .


Re: The 5 year crunch - how do we best avoid it?
From: Les
Date: 10/29/99
Time: 5:42:52 PM

G'day Boyd,

Thanks for your thoughts. The issue of the "5 year crunch" hit me just out of the blue, so to speak. And the answer may be as simple as you suggest (refinance for another 5 with another lender).

I entered it simply as a "devil's advocate" type of question - it's easy to go with the hype, see only the good, and ignore or gloss over the things that could trip us up. It does apply to me to a small extent as I have run a bunch of spreadsheets that point to maximising the entry into this type of investment for best growth, but it can lead to things like the "5YC". And, in following my calculations, I jumped in with 2 properties right off the bat. No regrets, and I know it IS the way to go FOR ME!! I'm ambivalent about getting a 3rd right now - I'll probably put a 3rd on the back burner for a few more months.

Thank you, too, for your comments - I guess a forum is where we get to compare notes, and it's always pleasing to:

1) find someone who agrees with you (especially if you've already made a move). It can help to bolster people up in their decision-making, and commitment - we all know it can be "lonely" treading a path less followed, so thanks to Jan and Ian for giving us the opportunity to assist each other.

2) It's also nice to hear when someone else benefits from, or appreciates, your point of view. The beauty of a forum environment is that it allows us to learn from other's knowledge (a la Jan's "101 stories") without having to find out the hard way.

Anyway, Boyd, re my profession - I'm a problem solver from way back - in the computer industry. The real estate arena is relatively new, but I am both an avid reader, and questioner - I tend to play "devil's advocate" with myself, too ;^) I intend to retire without the need for a pension and rental real estate is looking like the main chance for that. However, I'll keep reading, questioning, and looking.

At the moment, the thing I like most about real estate (10% down, Interest Only) is that the equity grows, but the mortgage remains at the original figure, and inflation is hacking away at that, so that your repayments are in "tomorrow's dollars". IS THERE a downside??????? Apart from 5YC, and that is able to be overcome, I don't see one. And that's nice.

Regards, Les

 

[WebBoard]

Boyd

Reply: 1.1.1.1.1.1
From: Mike .


Re: The 5 year crunch - how do we best avoid it?
From: Boyd
Date: 10/31/99
Time: 4:29:45 PM

G'day again Les,

Re "FYC", I would think the only time it might not be feasible to refinance after the initial 5 year term would be in periods of low inflation when the cost of doing so is insignificant to the profit you are making. But then, if you reverted to P&I, you'd have more money going out on the same amount of houses. Catch 22 situation. Also, when you have several properties, the refinance costs will add up. You did well to catch onto (and name) the 5YC, obviously something for us all to watch out for. I'm not really comfortable with IO myself, so I'll be fairly ok on that front.

On another note, we just had our offer accepted for house number 4. It's a bit of a "do upper" so we'll move in for 12 months and get the hands dirty for a while then it's a rental.

Regards, Boyd.

 

[WebBoard]

Les

Reply: 1.1.1.1.1.1.1
From: Mike .


Re: The 5 year crunch - how do we best avoid it?
From: Les
Date: 11/1/99
Time: 12:59:57 PM

Good for you, Boyd - and (says he donning his Devil's Advocate hat) was this purchased IO, or P&I ? ;^) <--- Note the evil wink!

And will the RAAF continue the subsidy? Or does that only apply when you live where they put you?

Les

 

[WebBoard]

Boyd

Reply: 1.1.1.1.1.1.1.1
From: Mike .


Re: The 5 year crunch (and other stories.)
From: Boyd
Date: 11/6/99
Time: 9:28:48 PM

G'day Les,

Been busy for a while so it took me a while to get back to you. My new home is P&I, as are our other places. I know our properties aren't as cost effective as they could be due to P&I loans but everyone has to be comfortable with their own situation. Not to say that I might not re-consider IO in the future. When it comes to loan structure, I guess I'm not a very aggressive property investor.

No, the RAAF won't pay for my new place as it's not RAAF owned or leased. It would be great if I could talk them into paying off my own home. Everyone would enlist!!! As the new house is in the local area, I lose my entitlement to RAAF supplied housing. I am only entitled to a subsidised house if I don't already own one in the local area. Local area is defined as being within a 32 km radius of the RAAF base. But I am entitled to a full removal at Commonwealth expense, including a nights accommodation while all our furniture is being packed. Not bad at all. I was having visions of many trips in a borrowed ute.

I have struck a minor hurdle in the purchase of our new house. The vendors (ANZ bank) have just had it revalued and it came in $11 000 over their last valuation, which was the purchase price on our offer. We haven't sighted a written acceptance of our offer yet but the vendor conveyed verbal acceptance (on the price which we viewed the property at) to the agent who in turn, gave us verbal notification of the vendors reply. Now there is some hold up because of the new valuation. Obviously, they want to sell it for as much as they can. I'm pretty certain that a verbal agreement is as legally binding as a written one but I'll obviously be a whole lot happier when we have it in writing. We'll see what happens, should know more early next week.

Regards, Boyd.

 

[WebBoard]

Les

Reply: 1.1.1.1.1.1.1.1.1
From: Mike .


Re: The 5 year crunch (and other stories.)
From: Les
Date: 11/8/99
Time: 6:24:43 PM

G'day Boyd,

Sorry to hear about the "wrinkle" with your newest one - I do hope gentlemen's agreements still stand. But watch out - I remember reading "Solicitors will tell you that verbal contracts are every bit as binding as written ones - and they'll happily spend your money to prove it!" I certainly hope for you that it doesn't come to that.

Re the IO vs P&I - you're dead right - we call our own shots, according to our own judgements. With 3 and "one on the way" you sound like you are heading toward a very secure, happy future. Hope this latest gets sorted out to your satisfaction.

Regards, Les