Hello everyone,
can I get your opinions on these types of loans as I have one of each going on each rental I haveThanks
KeithG’day Keith…
More info please mate. Don’t be lazy. Give us some facts etc and I’ll respond as I’m sure others will as well.
Cheers
Bill
Bill O’Mara
Real Estate,Mortgages,Share Market Strategies.
[email protected]Gday Keith
As Bill said, not a lot of info given, however my general opinions are;
Interest Only – Pros
Improve cashflow
Certainty of interest and payments
Can service more loans.Interest Only – Cons
Lack of flexibility
Costs to pay out early
Rely on asset appreciation to build equity.Principal and Interest – Pros
Flexibility
Pay out early without penalty
Build equity by extra payments
Can be lower interest ratePrincipal and Interest – Cons
Exposed to interest rate hikes.
Principal payments not deductible.For me Int Only has worked well as it has enabled me to purchase more properties (all -ve CF mind you) and maximise my leverage to the growth in values over the last 15 years.
If investing for +ve CF then I would look at P&I as growth would most likely be negligible, at least in the areas I have researched.Regards
Clive
Clive
In reading your pros and cons of IO or P&I I thought I was reading the pros and cons of fixed versus variable
ie.
Interest Only – Pros
Certainty of interest and payments – only if fixed.Interest Only – Cons
Costs to pay out early – only if fixed.Principal and Interest – Pros
Flexibility
Pay out early without penalty ??Principal and Interest – Cons
Exposed to interest rate hikes – only if variable.The other comments you had are certainly relevant. All of my loans are IO, with one being a LOC so all ‘extra’ cash goes in there when not needed.
Cheers
Melthank you gentlemen for your reply, my main idea is capital growth in my properties.
At the moment +ve cash flow is not good for me at the time all I want and achieveing is break even and capital growth.Keith
Keith, it sounds like you are either a) attempting to avoid giving even more of your income to an ex spouse, or b) you want to maximise tax benefits whilst still not actually ‘losing’ money. If I were you in this instance, I would stick with interest only loans, and have any spare cash sitting waiting ready to go.
Cheers
MelMel,
I am trying to maximize my tax benifits not the wife and if there was a way of avoiding capital gains that would be a better optionKeith
Keith, I hope you didn’t take offence by my options.
The easiest way to avoid CGT is to never sell. Other ways are to only sell in a year where your income is quite low (perhaps some CGT losses, or maximising your interest deductions etc.).
Cheers
MelKeith, P&I or IO has little bearing on your tax situation, just your cash flow. Sure with P&I you are going to be reducing the principal and therefore your interest payable, but not by a big percentage in the early years. Eg on a 100k loan @ 6%, 25 years P&I payments are $644, cf $500 I/O. After 12 months the residual will be $98219, which would be $491 per month in interest, ie you’ve reduced your tax deduction by $9 per month after a year.
There isn’t much difference between IO and P&I if you are in the max tax bracket. (Here he goes again they are all saying!) This is due to the effect of inflation, which is pretty similar to the after-tax interest (51.5% of 6% = 3.06%) that comes out of your pocket.
P&I is good for forced saving if you are not pushed to the limit so that IO would be necessary. I’m in that situation now. If I just had IO loans, I would probably squander the extra cash flow. IO with an offset account would be very useful on your PPoR if you intend to convert it to an IP later on, to maximise that loan when it becomes tax deductable, and minimise the loan on your new PPoR.
Just a few thoughts.
Regards, Jim
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