In August last year we published an article contemplating credit challenges ahead.\u00a0 I point this out with no great delight because, for once, it seems we had it right. \u00a0Drop me a line if you want a copy of the original article, it\u2019s on our web site.<\/p>\n
Anyway, one of the key points I raised a year ago was the expected pressure on lenders to reduce interest only lending. That prediction has most certainly come home to roost.\u00a0 In the past few months we have seen a range of major and second tier lenders bring in restrictive lending standards for interest only property finance and we have seen a number also increasing interest rates on interest only finance. To be sure interest only finance presents a higher credit risk to a lender so I don\u2019t necessarily have a problem with differentiated pricing to reflect that risk.\u00a0 The obvious question is \u201cWill there be a flow on effect for business and commercial finance? \u201d.<\/p>\n
The answer is already with us and unfortunately it\u2019s a Yes.\u00a0 There are already major lenders out there whose credit policies do not allow for interest only management rights finance.\u00a0 I should clarify that by saying that this policy applies to borrowers chasing maximum gearing.\u00a0 Go for lower gearing and the interest only option can be available. I should also make it clear that while some lenders are going down the P and I route others seem comfortable with interest only, even at 70% gearing ratios.<\/p>\n
As we pointed out in August last year there are good reasons to go with interest only finance and certainly strategies for presenting your plans in a favourable light with the banks. Having said that there are two strategies that we strongly suggest you don\u2019t use.\u00a0 The first is the main reason borrowers seem to ask for interest only and it\u2019s got very little to do with tax planning. I want interest only so I\u2019ve got plenty of money left over for good times, travel and lifestyle.\u00a0 Sorry, the bank doesn\u2019t care and if you can\u2019t repay debt due to lifestyle choices that\u2019s probably not a good look for any applicant.\u00a0 The second reason is even more concerning.\u00a0 I want interest only because I can\u2019t afford P and I.\u00a0 Again, sorry, no dice on this one either.<\/p>\n
Let\u2019s have a think about that last reason in the context of debt servicing.\u00a0 Banks lend money over a specific term.\u00a0 Let\u2019s say it\u2019s 15 years. The borrower requests the first 2 years interest only. At the end of that 2 years we need to be able to show the bank that the borrower can afford to repay the loan over the balance term of 13 years.\u00a0 Just to make that calculation a little more challenging we also have to demonstrate that the borrower can meet that P and I obligation at interest rates 2% to 3% above current levels.\u00a0 You can see where this is going\u2026..I hope. Essentially the longer interest only period you ask for the tighter the debt service numbers get.<\/p>\n
Incredibly banks have not always assessed debt service capacity in this manner but I can tell you that they all do these days.\u00a0 Given the current demeanour of regulators and ratings agencies we expect debt service guidelines to become more conservative and onerous over the next 12 months for both personal and business borrowers.\u00a0 In particular we expect lenders will place less reliance on tax savings through negative gearing on property, will make higher allowances for living expenses and will test debt service capacity sensitivity at even higher rates.<\/p>\n
I know what you\u2019re thinking.\u00a0 I\u2019m on interest only finance right now and it\u2019s coming to an end. I want more interest only, I like interest only, I am addicted to interest only and my finance contract says I am going to P and I.\u00a0 Please don\u2019t take my interest only away. \u00a0How do I restart the interest only clock.\u00a0 There are certainly strategies for achieving this outcome, the most obvious being to simply refinance to another lender.\u00a0 However, there are also good arguments you can put to your current lender to negotiate a further interest only period or indeed to restart the entire loan term clock.<\/p>\n
One of the better strategies to achieve initial interest only terms or further terms on existing finance is to argue the notional amortisation strategy.\u00a0 We have just used this strategy successfully for a new applicant and achieved great results for a number of clients who wished to roll interest only loans for a further term<\/p>\n
So, what the hell is notional amortisation.\u00a0\u00a0 Sorry, I can\u2019t give that one away.<\/p>\n
Gratuitous plug\u2026\u2026\u2026\u2026\u2026\u2026\u2026\u2026for all these reasons use an industry expert finance broker!<\/p>\n
<\/p>\n","protected":false},"excerpt":{"rendered":"
In August last year we published an article contemplating credit challenges ahead.\u00a0 I point this out with no great delight because, for once, it seems we had it right. \u00a0Drop me a line if you want a copy of the original article, it\u2019s on our web site. Anyway, one of the key points I raised a year ago was the expected pressure on lenders to reduce interest only lending. That prediction has most certainly come home to roost.\u00a0 In the past few months we have seen a range of major and second tier lenders bring in restrictive lending standards for interest only property finance andRead More →<\/a><\/p>\n","protected":false},"author":1046,"featured_media":542,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_exactmetrics_skip_tracking":false,"_exactmetrics_sitenote_active":false,"_exactmetrics_sitenote_note":"","_exactmetrics_sitenote_category":0,"_mbp_gutenberg_autopost":false,"footnotes":""},"categories":[3,4],"tags":[],"class_list":["entry","post","publish","author-mikemikephippsfinance-com-au","post-540","format-standard","has-post-thumbnail","category-accounting-and-finance","category-the-management-rights-market"],"_links":{"self":[{"href":"https:\/\/theonsitemanager.com.au\/news\/wp-json\/wp\/v2\/posts\/540","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/theonsitemanager.com.au\/news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/theonsitemanager.com.au\/news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/theonsitemanager.com.au\/news\/wp-json\/wp\/v2\/users\/1046"}],"replies":[{"embeddable":true,"href":"https:\/\/theonsitemanager.com.au\/news\/wp-json\/wp\/v2\/comments?post=540"}],"version-history":[{"count":1,"href":"https:\/\/theonsitemanager.com.au\/news\/wp-json\/wp\/v2\/posts\/540\/revisions"}],"predecessor-version":[{"id":541,"href":"https:\/\/theonsitemanager.com.au\/news\/wp-json\/wp\/v2\/posts\/540\/revisions\/541"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/theonsitemanager.com.au\/news\/wp-json\/wp\/v2\/media\/542"}],"wp:attachment":[{"href":"https:\/\/theonsitemanager.com.au\/news\/wp-json\/wp\/v2\/media?parent=540"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/theonsitemanager.com.au\/news\/wp-json\/wp\/v2\/categories?post=540"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/theonsitemanager.com.au\/news\/wp-json\/wp\/v2\/tags?post=540"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}