All Topics / Finance / Do you opt for principal and interest loans or interest only loans?

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  • Profile photo of LeilahLeilah
    Member
    @leilah
    Join Date: 2007
    Post Count: 8

    Hi Everyone

    Another question (hope I am not bothering anyone).

    What do you tend to use for IPs, principal and interest loans or interest only loans? If you use an interest only loan do you do this for the life of the loan or for a limited period before it becomes principal and interest? I am not sure how a loan could be an interest only loan for the life of the loan as this would mean that you would never end up outright owning the property at the end of the loan. Could someone explain this to me?

    Sorry if this question is obvious but am still learning the ropes.

    Thanks and cheers,

    Leilah

    Profile photo of Mortgage HunterMortgage Hunter
    Participant
    @mortgage-hunter
    Join Date: 2003
    Post Count: 3,781

    I use IO to maximise cashflow.

    When I have accumulated enough property I will start on the Principal.  I honestly don't care if I never pay off the properties and die with a debt.  I don't feel the need to own anything outright.

    I just want the rising capital value and the rising income streams.  I let inflation take care of the property value.

    My parents bout Sydney waterfront in the 70's.  If they never paid down their loan they would owe $40K on a property worth in excess of $2M .  Do you think never "owning" that property would worry them??

    This concept of having to pay off a property is a mental block that all newcomers to investing must tackle.

    Cheers,

    Profile photo of v8ghiav8ghia
    Member
    @v8ghia
    Join Date: 2005
    Post Count: 871

    Hi Leilah. After a certain period, the loan converts from interest only (say, 1st 10 years) to P&I for the remaining term (last 20 years) with payments adjusted acordingly.Hard to plan that far ahead eh? All the best.

    Profile photo of XeniaXenia
    Member
    @xenia
    Join Date: 2002
    Post Count: 1,231

    Yes, IO will maximise your cash flow as Simon said :)

    Profile photo of DraconisVDraconisV
    Participant
    @draconisv
    Join Date: 2006
    Post Count: 319
    Xenia wrote:
    Yes, IO will maximise your cash flow as Simon said :)

    IO will also maximise your deductions as you will have a constant debt for that property which is tax-deductable and not a decreasing one.

    Chris.

    Profile photo of HutchHutch
    Participant
    @hutch
    Join Date: 2004
    Post Count: 137

    All our developments and IPs are IO for most of the reasons posted above.
    (But I do have P&I on my PPOR, as it was mt first property that I purchased 8 years ago and wasn't interested in IPs at that stage!)

    Profile photo of ducksterduckster
    Participant
    @duckster
    Join Date: 2004
    Post Count: 1,674

    Hopefully the value of the house goes up in value over time where as the loan balance remains the same.
     

    Profile photo of HandyAndy888HandyAndy888
    Member
    @handyandy888
    Join Date: 2005
    Post Count: 160
    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    At least with IO you have the choice of paying extra when you have the money (like a PI loan) and can then reduce your repayments if need be. With a PI loan you are stuck in paying PI.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

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