Ponzi-borrowers cry poor on interest-only reset

Via the ABC:

When Laura Christopher bought her house in Ipswich, Queensland, she signed up for an interest-only period.

“The fact the repayments were going to be a bit lower was the major drawcard,” she told 7.30.

“But I didn’t quite understand the implications.”

The reason repayments were originally lower is that during an interest-only period, borrowers are not paying off the debt they owe to the lender.

When the term ends — or resets, as it is called in the industry — a borrower will start paying off both principal and interest unless they can secure an additional interest-only period.

And for those who can not negotiate another interest-only loan, it has the potential to increase their repayments by thousands of dollars a year.

Half a trillion dollars of loans to reset

During the most recent property boom, mortgages on interest-only terms became extraordinarily popular in Australia, at their peak accounting for nearly 40 per cent of the market.

The financial regulators realised there was a risk some borrowers signing up to interest-only periods might struggle when they had to start paying back the principal.

According to the Reserve Bank of Australia, the move from an interest-only period to principal and interest repayments costs borrowers, on average, an extra 30 to 40 per cent.

If people are unable to afford the jump, they could be forced into default or into selling a property.

A lot of people doing that at the same time could lead to large falls in the property market.

So, the regulators forced the banks to massively curb how many interest-only terms they were offering.

But the RBA also warned last year that, given the huge number of interest-only loans already agreed to, there were nearly half a trillion dollars of loans resetting over four years and with the new tighter rules on interest-only terms, a lot of those borrowers would not be able to extend the interest-only period.

‘A great deal of stress’

In Ms Christopher’s case, the interest-only period came to an end in 2016 and her bank did not want to extend the term.

Now paying off the principal as well, she saw her repayments jump by nearly $5,000 a year.

“It causes me a great deal of stress and anxiety,” she said.

“I do manage to keep it to myself fairly well but there’s still always that fear that if something big was to happen, I don’t know where I’m going to get the money from to try and keep things going.”

For people who are faced with a steep increase in repayments they can not afford, one option is to attempt to offload the property to pay down the debt.

But Ms Christopher could not get the price she wanted.

“When I tried to sell the house, the way the agent had marketed it was that it was an investor liquidating an asset, which bought out all the tyre-kickers who came in with ridiculous lowball offers,” she said.

Ms Christopher is holding on but she is still struggling with the repayments, even after three interest rate cuts by the Reserve Bank this year.

‘Payments would have gone from$2,000 to $7,000’

Retired police officers Peter and Bronwyn Dwight built up a large property portfolio to fund their retirement.

“After I got interested in property investing, I read so many books on the matter and I decided to create a goal to make a goal for 30 properties,” Mr Dwight told 7.30.

“I think we got up to 16 income-producing properties and that meant we didn’t quite reach our goal.

“But, hey, we set a goal for Mars and we landed on the moon.”

Most of their properties are currently in interest-only periods.

“We went with interest-only mortgages because they provide a cash flow, you’re not paying off the loan, as such,” Mr Dwight said.

They took out a 30-year loan with the Commonwealth Bank on one of their properties.

For the first 15 years, they only paid interest on the loan — with three separate five-year interest-only periods.

When the most recent interest-only period reset this year though, the bank would not give them another interest-only period.

So they faced having to repay the principal in just 15 years.

“If it was going to revert to the principal and interest on the current interest rate that they had, the payments would have gone from about the $2,000 per month up to close to $7,000 a month,” Ms Dwight said.

“Which just wouldn’t have been financially viable for us to maintain, it would have forced us into having to consider selling a property before we were ready to do so.”

After over “14 or 15 applications” to different banks, the Dwights were able to finally secure another interest-only term.

Prepare or struggle

But the Dwights are not out of the woods yet.

They have many other interest-only loans due to convert to principal and interest over the next few years.

“We’ve got five lenders and eight loans,” Mr Dwight said.

“So in the next this year, for instance, there’s two more to go.

“And then over the next three to four years, they’ll begin to come out progressively.”

Ms Dwight warned others not to get caught unaware.

“I would suggest that there are a lot of people who are facing the same difficulties that Peter and I have just been facing and continue to face,” she said.

“If they’re not thinking about it, and they’re not preparing themselves, and they’re not working it through, they’re going to find themselves really struggling.”

Despite their difficulties this year, Mr Dwight remained confident that property was the right option for their nest egg.

“I think the demand for housing is still very, very strong,” he said.

But he is still keeping a close eye on how the interest-only transition plays out.

“With people coming out of interest-only loans all in one hit, I don’t know what will happen,” he said.

“I suppose that we will just ride that through when it happens.”

Don’t ignore the risks

So far, the concerns about the glut of interest-only terms ending at the same time have not caused a surge of loan defaults or investors fire-selling their properties, according to economist Saul Eslake.

Interest rate cuts appear to have helped turn around the market and banks are once again loosening their lending standards with the threat of the royal commission now behind them.

But Mr Eslake warns that people should not ignore the risks.

“It could be that the people for whom the transition is going to be most difficult is the cohort that is yet to make the transition, whereas those who could do it comfortably did it sooner rather than later,” he told 7.30.

“Indeed, some of the Reserve Bank work suggests that a number of people have transitioned ahead of the legal requirement to do so.

“So we’ll have to wait and see how difficult it is for the remainder.”

The first example may or may not be the victim of predatory lending. The second one sure ain’t. Either way, the path to further ponzi-borrowing is now opening up for more specufestors as banks chew through the interest-only reset:

 

As banks ease lending conditions.

David Llewellyn-Smith

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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Comments

    • What I did was rub my index and thumb together and pretended I could hear the strains of Adagio for Strings in G minor.

      It was stirring.

  1. Dipswich?? Hahahaha! Well, aren’t you just confirming the fact that the IQ of the area is calculated just by summing it up, and event then it’s below room temperature!

    You shot for Mars and you found yourself out on Uranus!

  2. I’m always astonished at the shameless greed of the people they find to appear on these programs. Here we have a couple of retired police officers who wanted early retirement and a life of leisure and indulgence (caravanning around the country, motorbikes, etc). Did they earn the money to enjoy this kind of lifestyle? Did they save it or invest well over a period of time? No, they chose instead to leverage up massively on IO loans to gamble on asset prices. And they will be the first to demand a bail out when something goes wrong and fail to see that they have done anything wrong.

    • Having to sell the investment property because they can’t afford the repayment is.. unfair?

      • Locus of ControlMEMBER

        I’m not sure whether it’s an entitlement complex or cognitive dissonance or just plain greed, but whatever it is it has me shaking my head in disgust…

      • What I’d prefer is that these ex-police officers would have to work as shopping mall security until they’re 75 in order to pay off their property gambling debts.

      • They have been sold a fantasy and told that it is all guaranteed easy money. Now they are experiencing cognitive dissonance.
        These are not sophisticated people. They are the perfect victims because the spruikers and middle men have all made their money leaving the dumb victim holding the can.

        • mate, going for 30 properties with no plan to repay any of the loans means greed. Yes they are plenty stupid but not stupid enough to know it was too good to be true. fck em.
          taking IO loans and complaining when prices go down so they can’t refinance to another IO loan?? Was there a plan to ever repay any of those loans? Any such 1d1ot deserves to be let go under – trolley jobs for life for all of them as per comment above.

          Sad part is current Gov been elected with only one mandate.

          • Yes they are greedy but they lack the sophistication to temper their greed. They are the perfect targets for an exploitative parasitic industry. Just like a casino who makes money off the back of turning greedy illusions into financial losses.

            But f*uk them, they roll the dice. They wear the loss.

          • 16 properties…. that is their undoing. They should have accummulated 16,000,000 properties to become too big to fail!!

          • Reusa would be proud, you see the Liberals were right Nurses and Police officers are just trying to get ahead using negative gearing. What they don’t tell you is that Nurses and Police officers have 16 properties each. :).

            So they are having a go, and getting a go.

  3. SnappedUpSavvyMEMBER

    this stood out for me: “We’ve got five lenders and eight loans,” Mr Dwight said…..

    should this man get an AO for such an achievement

    • Jumping jack flash

      Yes definitely an AO.
      Doing it for Australia!

      Let that be an example to the rest of you slackers. If you haven’t got at least 6 loans, you’re not trying hard enough!

    • and he will be given one – he had a go.
      While rest of us will be deported back where we came from. We refuse to blend in and load up with debt to the eyeballs – and off course we don’t complain to be saved if we lose money on our investments. We accept responsibility for our actions. fck me!!!!
      Years ago I thought this was easiest going country as I did not need to change anything to be accepted – was already drinking (social), love barbie, love beech, outback and listen to some cool music. How things change with time.. If you don’t have few IPs you are biggest scum and ppl look down on you if you say you are a renter. All I now hear, when occasionally turn TV on, is RE prices, snapped, savvy etc..
      Even ABC refuses to point out the obvious – houses for families to live in and not for speculators to gamble on. When did we forget this?

      Edit – almost forgot to sign it – fckn.

  4. These people are too stupid to be allowed out without adult supervision.

    With interest only loans, you only pay back the interest for a while, so you don’t pay so much each month. Then, after 5 years or so, you start paying the principal as well and the monthly repayments go up. That isn’t a complex concept, and if Laura didn’t understand the implications of that then she barely qualifies as sentient.

    As for Peter and Bronnie, well, I reckon they’re stuffed. If they were knocked back by the CBA on their fourth IO rollover on the first property, and had to put in “14 or 15” applications to get just one approved with a new lender then the chances of rolling over all of their IO loans are vanishingly small. They may have to consider selling a property, or many properties, “before they’re ready to do so”, and their retirement dreams are going to turn into a nightmare. And good riddance to them, the greedy, selfish stupid idiots.

    • Locus of ControlMEMBER

      I want to ask “well if you don’t have money now (for P & I repayments), what makes you think you’ll have it in the future?” Is it optimism bias or what? The psychology of it all just astounds me. I grew up with “a dollar today is worth more than one tomorrow” and “there are no guarantees in life”. If I don’t have the dollar today I’m not thinking it’s going to be raining cash on me tomorrow for some inexplicable reason. Money is not weather.

      • I was puzzled by that too. I presumed that they intended to just pay interest only for the life of the loans, and then sell the places for capital gains “when they’re ready”. But maybe, what with apparently having the IQ of oysters, they don’t understand that if they want to keep the properties then at some point they’ll have to pay back the principal.

        I would really like to have seen the interviewer ask them when they intended to pay back the principal on all these loans, and how they were going to do it.

        As another thought, if they have 8 loans, and it takes them roughly 15 applications to get a new IO rollover per loan (because they are obviously assessed as being good credit risks by the lenders), then they’ll need around 120 financial institutions to apply to. Are there that many home finance lenders in Australia? If not I wonder if it’s occurred to them that they’re going to run out of lenders to apply to pretty quickly.

        As is so often the case with the hard of thinking, I suspect that their future is not bright, and I don’t care about them at all.

        • Locus of ControlMEMBER

          “I presumed that they intended to just pay interest only for the life of the loans, and then sell the places for capital gains “when they’re ready”.” A fair enough assumption.

          It probably makes them poor at calculating (or maybe accepting) risk then I guess. It’s not like the lender hides it from you. IO is limited period almost always and the terms are stated when you sign up to the loan. There is always a risk the lender will ask for principal payments too. IO rollovers are NEVER guaranteed. There are no guarantees in life. As far as I see it, they took a risk (IO forever), they lost (asked to stump up for P & I) and as far as I’m concerned, they can wear it. That’s the lot of the gambler. Got to know when to hold ’em, know when to fold ’em, know when to walk away – and walk away with grace, not grizzling!!!

        • TailorTrashMEMBER

          Having to actually pay back money you borrowed is such a 20th century concept . In the brave new world of 21st century straya and it’s property religion such a thing is ridiculous….and quite unfair too ….it seems .

        • Clearly they’ve exhausted the lending avenues, it’s time now for the lender of last resort = Australian taxpayer.

        • My guess is that “property doubles every 7 years” was their repayment plan. After 7 years, sell half of them to pay off all the loans, and retire on the income stream from the half they kept.

          The 30 property goal was likely a similarly detailed calculation. “Keep 15, rented out for $400 per week each, that’s $300K per year in retirement.”

        • My guess is that they intended for inflation to minimise the debt to nothing within 30 years time. So paying only interest for the next 30 years would mean eventually the debts are so small that the rental income would allow them to pay off the loan within a year or 2.

          For example place I rent in Sydney would have been purchase by my landlord in the 70s for $50-60k max. (Inner West about 600sqm of land). Today I pay him about $33k per year in rent for it. Now if he had held a loan for 30 years, by today’s rate the rent would more than cover the repayments. I guess the strategy is that the tenants are paying the interest off (not you) so it doesn’t matter how much it’s cost you over 30 years (in theory of course).

          But then again, maybe they aren’t thinking like that? Who knows..

  5. Lol!
    Lady learned the truth about real estate ‘agents’; they pretend to be your advocate (understanding, with you, arm around your shoulder) then they tell the market you’re a ‘motivated’ seller (you are one) as they just want the commish clip!

    • I thought that was hilarious because it’s not like she would have been unaware! She could have told the agent not to advertise it that way. Seems she went along with it.

  6. Speaking to a customer while on client site yesterday (funnily enough it was at Wallbies Thai under Mascot Towers) he told a story about a friend of his who works in the Petrolium Industry and his story of having a go. It goes something like this …

    – Works as Petro Engineer earns $260k in the Pilbara
    – Buys 11 properties in the Pilbara for approx. 650k each during mining boom. Gets ridiculous rents because of FIFO etc.
    – Mining boom ends, arse dies in property market, makes a 400k loss on all properties
    – Loses job, can’t make repayments as rental income virtually non-existent
    – Struggles to find job at anywhere near $260k, other debts mount up, develops gambling addiction
    – Basically whinges to ombudsman about situation – big bad banks lending to me etc. etc. not my fault
    – Ombudsman takes case, clears 85% of his debts to bank

    I’m like, that’s a hell of a story, but he’s an idiot for doing it and should basically lose everything for his utter stupidity. But I guess, if your sob story falls on the right ears, you too can get off bascially scot-free.

    #ifyouhaveago #yougetago #howgoodisstraya #scotfree #noresponsibility #bankingrcnow #boomtimes #bailout #howgoodaretaxpayers

    • Locus of ControlMEMBER

      Crazy. I relayed a similar story on here about a friend of mine who took an IO loan and bought a modest 2 bed apartment in Darwin “as an investment” in 2014. She already had another modest 1 bed apartment (owner-occupier) at the time. Thought she was crazy as she had no savings (bar what she’d paid off on her 1 bedder), a chequered work history and was then in receipt of a carer’s pension through Centrelink. Property was rented/ AirBnBed for a bit, bringing in a little income, but no fortune. Long story short, roll forward a few years, she’s no longer a carer (income dropped to Newstart), the bank rolls the IO over to P & I and the Darwin property market tanks (no offloading either property and escaping the debt). Dire financial straits. Took the case to the Ombudsman who mediated with the bank (and took the position she should never have been loaned the money) to drop the interest portion of her debt, but ultimately the bank would not ‘wipe’ the loan. So now she has a zero percent interest rate for the life of the loan and only has to pay back the principal (still struggling financially, but no longer drowning I guess).

      I asked her why she took the loan and she reasoned “if the bank gave it to me, I thought it’d be alright. I’d assumed they’d done the maths”.

      • Borrowers should need to complete a written exam testing financial literacy before taking out a loan. Seriously.

        Or put warnings on loans like with cigarette packets.

        • Locus of ControlMEMBER

          I agree. They don’t let drivers on the road (with the responsibility for minding your and others’ lives) without first having completed theory and prac’ exams. A financial obligation like a loan is also a serious responsibility, not an entitlement, and should be similarly treated.

        • Hang on a minute… wot about the economy ?
          The whole bloody thing is tied together by giving loans to idiots.

          • You’re onto it, bols

            And when it all goes t1ts up there’s the taxpayer to backstop the lunatics who extended the loans in the first instance.

          • darklydrawlMEMBER

            This is true. For example the banks adore customers who cannot manage their credit cards well – so much so they actively try to steal them from each other (that is what all those “roll over your cc debt to us for zero interest for 3 months!” offers are all about.

            They know it is highly unlikely the customer will get their act together in that time and then, chaaah-ching! They are making easy money in interest and late fees.

            And Whilst they would never admit it, but they rather dislike the folks who pay it off each month, never pay interest or fees and use the banks’ money for free.

      • ” she reasoned “if the bank gave it to me, I thought it’d be alright. I’d assumed they’d done the maths”.

        That reasoning applies to the majority of borrowers — if you’re comfortable with it, I’m comfortable with it.

        Sad to say.

      • I asked her why she took the loan and she reasoned “if the bank gave it to me, I thought it’d be alright. I’d assumed they’d done the maths”.

        It’s pretty much the bank’s raison d’etre, so it’s not an unreasonable assumption.

        That said, people shouldn’t get to keep investment properties in such scenarios. Though on the flipside, the bank shouldn’t get to take possession of it either.

        Turn it into public housing instead.

    • Clears 85% of debt??? Are you serious??? Would this person have been the public a 85% cut of their profits if it went the other way?? Who is absorbing this cost?? Incredible.

      • Well, he could have declared bankruptcy and cleared 100% of his debts to the banks, and in that case the same people would be covering the losses. The banks, or their customers.

    • Mining BoganMEMBER

      Just thinking out loud here, but wouldn’t one of these petroleum engineer types have to know numbers and modelling and calculations and sh1t?

      I can understand the dumbarses I worked with falling into the bank’s trap but one of these guys?

      • Nah.

        I’m an engineer and I’ve spent my working life surrounded by Engineers. A lot of them are very clever in one direction (like designing electronic circuits). Ask them to think outside their own area of expertise (say, organising their finances) and they will do so with enormous self-confidence (because they think they know everything) and a complete lack of competence. I reckon it’s an aspect of the Dunning-Kruger syndrome.

        • See? The Moron Side of the Force is real.

          A normally rational person suddenly transitions to….. some sort of lobotomized entity – sudden and total detachment from reality or rationality – as if some sort of circuit has been activated as soon as money becomes involved.

        • Best not to talk of such subjects in economic academic circles. Microeconomic theory is based on the Rational Economic Man and the optimization of utility/returns/wealth. If the Dunning-Kruger syndrome is really true then the theory is based on an illusion.

  7. Only credit here is not being shameless enough to cry poor. To appeal for help is a good quality. But they have contributed to a massively stupid diversion of resources that is non-productive. 16 properties!

    • They are sailing ‘neath a ticking time bomb and are none the wiser. Quite staggering really.

      What gets me is the ‘property as home-run’ notion. You cannot loose!

  8. This is a common misconception and has no basis in truth

    The second one sure ain’t. Either way, the path to further ponzi-borrowing is now opening up for more specufestors as banks chew through the interest-only reset:

    And..

    As banks ease lending conditions.

    The Royal Commission had huge implications for interest only lending. Yes – there is no doubt that the availability is there (there is an availability for me to take out a $5 Billion loan to develop a gas plant in the tropics) – has absolutely ZERO bearing on whether or not those loans are actually made.

    The lending conditions prior to the RC involved a vast amount of borrowers from China – gone. The lending criteria was also not merely “dodgey” but outright fraudulent in what is believed to have been at least 60% (more) of loans.

    The number of articles covering this are replete in this fact. MOST of the people who we receiving these loans were being done due to outright fraud or at the least financial deception.

    Every single indicator right points to the top end only being able to access money and engaging in the real estate market.

    The new laws governing transparency and accountability in the banking sector also mean the banks not only have full access to a borrowers debts – including other loans, CORRECT wage statements, and credit card debts (payday lenders etc) but all other debts and obligations such as school fees – NONE of which were available or required previously.

    In the absolutely best case scenario we will see a return of maybe 50% peak of what was being done before – however factoring in the apartment bust and construction employment collapse lets take that down another 20%.

    • All these checks could and should be done before, Expect to return to your usual programmming shortly, in fact we already have. The lack of consequences following the RC has effectively green lit this activity to continue into the future.

      • “All these checks could and should be done before”

        More so, it takes a royal commission to make this prescription of behaviour?

        A banker has one job, to assess the creditworthiness of a borrower… that’s it. If they’re not doing that, then a borrower may as walk into a vault, take us much money as they want and leave an IOU.

        Creditworthiness – service the debt, pay back the debt.

        • Actually, I would say the banker has the responsibility to ensure the debt gets repaid. With a mortgage on a property in an increasing price environment the ability to pay/service the loan is mostly irrelevant to that, but highly dependant on increasing prices. So expect bank behaviour to lean towards increasing prices.

          • “Actually, I would say the banker has the responsibility to ensure the debt gets repaid.”

            I said that in my last sentence.

            “With a mortgage on a property in an increasing price environment the ability to pay/service the loan is mostly irrelevant to that, but highly dependant on increasing prices. So expect bank behaviour to lean towards increasing prices.”

            When you understand how Basel II was written, as well as banks NOT being reserved constrained, but capital constrained, you’ll see what they encourage in terms of property prices.

    • The banks will do what the government – APRA-RBA cabal tell them, which is to loosen away and return to the good old days of cowboy lending. 10% rise = 0.5% GDP, oh yeah baby Joshy! Remember the Libs never wanted the RC and don’t care to implement anything.

  9. There has to be tens of thousands of these dribbling financial dullards across Australia. No need to wonder how the psycho Morrison got elected.

  10. Jumping jack flash

    “When I tried to sell the house, the way the agent had marketed it was that it was an investor liquidating an asset, which bought out all the tyre-kickers who came in with ridiculous lowball offers,” she said”

    Oh the humanity!

    • And all the lowball offers came from fellow specufestors no doubt.
      At least as the saying goes, there is honour among thieves.

    • A strange lack of agency there. She seems to be saying “My employee, the RE agent, marketed the property in a way I didn’t like but I was totally helpless and unable to resist his weird mesmerising powers and somehow when he told me what he was gonna do I found myself unable to utter the words “Don’t market my property that way. Do it this way””.

    • I like how she “couldn’t sell” because the offers were less than what she paid 7 years ago.. haha. So instead she decides to suffer indefinitely.. 🙂 People make their own prisons I guess..

  11. the way the agent had marketed it was that it was an investor liquidating an asset, which bought out all the tyre-kickers who came in with ridiculous lowball offers …

    Ha ha.

  12. The truth of the matter is if you have 15 properties all on interest only …you cant afford anyone of them. And what kind of bank does 15 yrs interest only? Seriously!

      • lol – only scary thing is everyone with savings will be screwed when the thing hits the fan. We will be required to do our bit to save the “economy” but in essence will be to save greedy gamblers.

        • Yep, that’s why I decided to stop being a “saver” it was working against me and it was going to be my undoing in the end. I saw what was ahead and said, yep, no thanks. I was going to be bailing in the same idiots who were outbidding me on homes I wanted to live in.