Is it possible - IO loans for PPORs

[ellie]

Hello all you clever forum people. I have been reading for weeks and this is my first question for which I couldn't find an answer in previous posts. The question is, is an interest only loan posible for a principal place of residence? I know this is not normal but my income is very low at the moment and despite me being extremely frugal, buying the cheapest place I can to live in would still mean I would be paying a large proportion of my income on mortgage payments. If I could get an interest only loan it would make it a bit more affordable. I really want to buy my own place for my own sanity, emotional wellbeing etc. I can not bear to rent any longer. I expect my income to increase considerably in 2-3 years time. Then I could switch to principal and interest.

I have already considered buying with a friend/relative or using someone elses equity as security but this will not work for me.

El

 

[geoffw]

Ellie,

1. Ask a broker. There's a number on the forum- search for "invisible woman" and you will find a number (really )

2. Despite that, it does sound as if you might have trouble. Go back th the first answer - for a 25 year loan, I don't think that the difference between P&I an IO is that big in the first years.

 

[Kristine..]

Oh, Geoff, you are a tease!

Ellie, good for you

Unfortunately, assessing the customer's ability to service the loan is not that simple.

If you borrow, say, $300,000 (or $150,000 or $2,000,000, whatever) over a 30 year loan, and have the first five years interest only, then the principal (and interest) calculations are done on serviceability for the balance of 25 years.

Can you see the problem? If you are sitting right on the 40% nett servicing ratio now, then yes, maybe your income will improve over the next five years but lenders deal with facts only, not supposition.

Therefore, your future capacity to service the loan is based on current earnings. What percentage would a 25 year principle and interest loan require?

Lenders simply will not allow borrowers to pay 'a large percentage of income' to service the loan (there are some exceptions to this eg if you are earning squillions of dollars, but otherwise the general lending principles apply).

Ellie, it may be more sensible to look at how you can increase your income rather than decrease your expenditure if that is already at rock bottom.

Don't overlook the age old way of buying your own home - don't try and buy the mansion first. Buy a one bedroom flat rather than a two bedroom house. Go two train stops further out. Above all, don't give up.

Regarding brokers, Simon Macks is in Newcastle, and Rolf Latham is in Sydney. Rolf Schaefer and I are in Melbourne. I don't know of any other accredited brokers who post to the forum. Why not check with Simon or Rolf regarding your capacity to service and what your borrowing capacity actually is. That way you would have clear guidelines. If you know you can achieve purchase within eg six months it may make the wait more bearable.

Good luck, and good planning make things happen.

Cheers

Kristine

**************

Geoff - I discovered it was the heliotrope in my pocket which was making me invisible! Now, if I could only figure out how to fly??

 

[bundy1964]

Just be glad Kristine you don't get a call from me

Life in low/no docs land for commercial is now looking pretty good...even bettter than dealing with debank. Given the new options now for finance there would be a way to buy ( homestart here are good for low incomes ) or look at a wrap deal with one of the good wrappers and refinance out when the dreaded s word is better.

bundy

 

[Rolf Latham]

Hi Ellie

many lenders will allow IO for your PPOR IF the deposit component is at least 20 % - generally, its mortgage insurers that dont like it, but there are still ways around it.

What I have been finding for many first home buyers is that generally the lenders will lend more than they are personally comfortable to repay. So despite what level of income you do have, if you can only put aside x of that amount then it doesnt matter if you can borrow enough that needs 2 x to service.

Ta

rolf

 

[Fester]

Hi Ellie, mine may be a bit of a different situation to yours. When I first ventured into property invesment I had a Commonwealth Bank loan on our PPOR. When I bought my first IP my finances were set up that Westpac (professional package), through a broker, my old Commbank loan became an interest only Equity Access Loan. So for a while, until all the other property loans settled down a bit, my old home loan was interest only. I liked the arrangment because I could pay just the IO on it or pay whatever when things were rosy!

Fester

 

[Kristine..]

Originally posted by bundy1964
Just be glad Kristine you don't get a call from me

Life in low/no docs land for commercial is now looking pretty good...even bettter than dealing with debank. Given the new options now for finance there would be a way to buy ( homestart here are good for low incomes ) or look at a wrap deal with one of the good wrappers and refinance out when the dreaded s word is better.

bundy

Bundy I would certainly be glad to get a call from you (just don't tell Brains or else he will think I'm touting for business!).

Yes, there are all sorts of creative ways with finance.

But from what Elle is saying, earnings are low, finances are tight, etc

But this is not a permanent state of affairs and things will improve.

That's great. For a seasoned investor like you - or me - we can make decisions to leap financial chasms or not. On the Monopoly board of life, we are shuffling the Utilities around and sizing up the red hotels. If our borrowings are asset based no-one even asks to see our tax returns, but would you really recommend such loans to Elle? She hasn't mentioned how much deposit she has - perhaps only 3% plus FHOG - so she couldn't get very creative with that equity, could she?

For the young, first home buyer, would you really recommend wheeling and dealing - no-docs, low-docs, etc - or would you suggest a plain and simple, cheap, straightforward loan structured so that it will do the job (PPOR), has a bit of flexability and no huge break fees so that if Elle decides to sell up or refinance a couple of years down the track she's not facing ginormous penalties for doing so.

Bundy, please include me in your list of quotees when you buy the next office block. We can sculpt a financial marvel! But for Elle, borrowing is not and should not be rocket science.

Keep It Simple is a good motto and would get her into her own home quicker than trying to knit a fairisle jumper the first time she picks up the knitting needles!

Just to mix a few metaphors!!

Cheers

Kristine

 

[Nicholas H]

could you use a line of credit, my understanding is that if you just wanted to pay the interest, you can that way it can act as a IO in times of need, or you can put a lot more money in to it. The only reason I have heard that IO with offset is better is that it is cleaner to sperate taxable debt from non taxable debt. If it is your PPOR this is most likely not a concern.

 

[Ross Sondergeld]

How to buy and get something...

Hi,


3 Simple Steps (First PPOR... rentable and GCT free.)


1. Buy a cheap property... with an interest only loan.

2. Moved into the property as per ATO guidelines (PPOR)... then move out and rent the property (remember, 6 year rule).

3. Wow... you now own property. It's your PPOR... but you'll be renting it... and you should be able to move into it within a few years.



Best way... to enter market... if you're a little short of $$$$$$.


Ross

 

[mckennal]

I just bought my first PPOR with a 5% deposit and got the loan on interest only -- had to get LMI but they let me capitalise that on top of the loan to bring the LVR above 96%.

House was just under 200k in Perth.
Bank was ANZ. I had a mortgage broker.

Luke

 

[ellie]

Wow, thankyou all so much for the responses.

I have calculated differences on some different loans and there does seem to be a difference. I understand that lenders have tougher servicibility requirements for IO loans than P&I loans.

Kristine you mention 40% servicibility. By my calculations I would be around 60% and that assumes the cheapest one bedroom units in Sydney in the dodgiest, loudest etc areas. So far I have been assuming that with one of the good mortgage brokers here that I could get a loan of some type. Up til now I have been more thinking about how I would pay it. Now I realise that a lender is likely to say that I wouldn't be able to pay even a loan for the cheapest property in Sydney. I beleive I could manage a IO loan, but I can see why they would think I couldn't. I wonder if showing them actual expenditure over the last year would convince them that I practically live on the smell of an oily rag?

Re increasing my income, I have recently chosen to get out of IT management where I was working min 60 hr weeks, having to entertain clients, travel etc. Couldn't bear it anymore so moved to the career that I wanted. This means for now that I don't have much money. Before I changed careers though I saved $45K so I have that available for the deposit.

What are people's thoughts on buying a property (v cheap one) as an IP so the lender is more likely to lend it to me since rent will be paying a proportion of the mortgage instead of relying only on my small income. The tennant I choose, get a short lease (eg 3 months?) then give them their notice in time and then move in myself. By the time I tell the bank it has changed from IP to PPOR I have shown that I can manage to pay it. Do people do this? and what does the lender do in this case?

Bundy, I am wondering what it is that makes you recommend Homestart (I assume that is the NAB budegt loan we are talking of?). I haven't looked at it yet so am wondering what makes it stand out from the others.

Ross, good idea re moving in, then moving out and renting it out. Except I really want to live there myself. I don't care how basic it is. Am just fed up wuth renting. Any other ideas?

And so who is the "invisible woman"? or is that a joke that I didn't get?


Thankyou all so much for the ideas
Ellie

 

[Kristine..]

Ellie

The wonders of the internet will bring properties to you via the real estate websites, and they have facilities which will email you properties matching your criteria as soon as something is posted to the site.

Although this system is not perfect, it can save a lot of website surfing!

My residential property manager tells me that sometimes he gets a bit spooked by this.

He posts a new listing, and a couple of times before he has even got back to his office the phone is ringing with an enquiry for the property.

Property sales works the same way.

Believe me, the truth is out there. Start looking in earnest and you will be very surprised what comes your way.

Regards

Kristine

PS

The Invisible Woman gag refers to the Country Property thread of last week.

PPS

This looks nice

property 1957123 on www.realestate.com.au

Where is Manly Vale?

 

[bundy1964]

I guess you don't have similar there to our homestart.

http://www.homestart.com.au/

bundy

PS can do a lot of dammage with 45K savings