Hi guys,
What is the difference between Principle & interest and interest only repayment ? Why people tends to use P&I for PPOR and IO for Investment ?
Are there any significant reasons for that ??
Thank’s in advance
hi leo,
in simple terms.
P&I pays off the intrest owed on the loan as well a portion of your principle (or original cost of property).IO is exactly that. You are only paying the interest on your loan. So at the end of term (ie 25 years..) you WON’T own the property outright.
Each to their own.But…
P&I repayments are more per instalment but you get to own the prop at the end of term.
does this help?
THe basic principle of the principle and interest is intresting to know which will be of benifit. TO use positive gains and negative cashflows for examples above, you need to look at all the variables. Intrest only is just that, interest only is paid. The significant reason is to enable the accquasition of equity to create wealth in numbers and thus increase the output figures. Hope this will help.
Hi Leo,
Interest only repayments can offer flexibility over loan repayments; i.e. certain lenders will allow additional principle repayments during the I.O term.
Another benefit of interest only repayments apart from the increase in cashflow, is the ability to service further loans/Debt. Cheers.Regards
Steven
Mortgage BrokerMobile Mortgage Market
Ph: 0402 483 216
[email protected]
http://www.mobilemortgagemarket.com.auPLEASE note comments made should not be taken as specific taxation, financial, legal or investment advice.
From a tax perspective, you should have IO on investment loans while paying all extra off your non-deductible debt first.
Terryw
Discover Home Loans
Mortgage Broker
North Sydney
[email protected]Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Thank’s for the responds
I still don’t understand the concept of Interest Only. So, if we only pay the interest, it means at the end of the loan, will the property still belong to me ?? (since I only pay the interest).
Hi Leo,
while I am no expert, the way I understand it is that at the end of the day you dont own the property because you will still owe the original cost of the IP, when and if you do sell it you will still need to pay back the lender the full amount borrowed.Hopefully in this time the IP would of appreciated in value and you keep what ever growth the property has made less CGT. If you intend to keep the proprty for income in future years then you take out IO now to keep repayments down and use the rental income to pay this, when you are in a position to pay both P&I (when you have paid off PPOR)you hammer the IP until it is paid off where you own it outright and rent from this will give you income……….again I don’t profess to be an expert , if I am wrong please correct me as I have obviously got it wrong and don’t understand it anymore than Leo does ????
CheersLeo, you will not own the property until the principal has been paid in full. We have used interest only payments when it was a property we wished to flip within a short time. The money we saved by not paying the principal went toward fixing up the property. If you decide to hold the property for a longer period of time than refinance and pay down your principal.
Belinda
http://www.1040rUS.comJust imagine you had purchased a house in Sydney in 1970 for $20,000. You used an interst only loan of $16,000. If you kept rolling over your IO loan, then you would still owe $16,000. However compared to the current value of about $700,000 this is insignificant. In fact one year’s rent would probably be more than the amount owing.
By using an IO it reduced your repayments and you were able to buy 2 instead of one. You would be looking at about $1.3million in capital growth and equity.
Terryw
Discover Home Loans
Mortgage Broker
North Sydney
[email protected]Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Originally posted by belindac:If you decide to hold the property for a longer period of time than refinance and pay down your principal.
There is no need to refinance – just make bigger repayments when your budget and goals suit.
But for the keys to the advantages of I/O loans read Terry’s comments. Jump onto a web based loans calculator and see what the difference in monthly repayments between I/O and P & I is – then you’ll see the advantages.
Derek
[email protected]
0409 882 958
Property investment advice and researched property in quality locations available.Another major reason why people sometimes use interest only loans on their non-deductible debt is because it provides a bit of breathing space when things go a little bad.
Consider the following regarding non-deductible debt…
If you set your loan up as principal and interest and then lost your job, you would be required to continue making these higher repayments or you would have to restructure the loan. This would be hard if you currently don’t have a job. If you had no savings and made the minimum payment each month, you would have no redraw available to help you.
On the other hand, if you set your loan up as interest only and made the same repayments as you would if the loan was principal and interest and then lost your job, you would only be required to continue making the lower repayments without the need to restructure the loan. If you had no savings you would have redraw available to help you from the extra repayments you were making until you get into your next job.
Another major difference between principal and interest and interest only is that pumping extra funds into the loan or offset account will not change your minimum repayments if the loan was set as principal and interest. It will only reduce the loan term. The interest only loan structure would reduce the minimum required payments as well as the loan term if you made the same repayments as the principal and interest loan so there is even more flexibility.
A major downside with setting up an interest only loan against non-deductible debt is that a principal and interest loan will force you to pay your loan off in a set period while an interest only loan may see some people paying less than what they should and never paying off their home.
Robert Bou-Hamdan
Mortgage Adviser
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