Hi all, i am new to the forum, been reading alot and thought i should make my first post.
Im 18, on a salary of about 50k p.a and have no debts or payments. I have been looking into pi hoping to get into something around the end of the year/early 2011 as i only have 15k in savings at this time.
I am yet to have looked into how much i would be able to borrow. Have been tossing up between a small home or apartment and hoping to find the advantages and disadvantages. I was also hoping to get your advice on p/i and interest only loans. Would it be recommended to go into a loan with a 10% deposit or waiting to afford 20%
As i am young i am just wanting to look into all my option and the best way to go about starting out
Any advice would be great appreciated,
KyeThanks for the links
Kye,
Have a look around the site for info on interest only vs principal and interest loans.
It is generally accepted that I/O loans are more effective because they provide maximum cash flow advantages and flexibility for future changes of plan.
Also ensure that you get a 100% offset account with each of the loans. This will allow you to build up a cash base against the loan rather than paying the loan off, which can be especially advantageous if you ever decide to turn your PPOR into an IP.
Regards,
Steve.Thankyou YI,
Have been reading forums and other resources, so as i understand with a I/O loan, extra repayments can be made at anytime to contribute towards the principle?
As i am looking into purchasing an IP and not needing a PPOR at this time
Kye
Yes Kye, additional repayments can be made to the I/O loan (assuming it is variable, not fixed).
BUT
A better strategy might be to place the funds into the 100% offset account against this loan. This way the funds are available whenever needed, and you pay the same amount of interest as if you had paid the funds off the loan directly.
This advice assumes that you have good discipline and will not just spend the money because it is there! You have to think of money in the offset account as equity.
Regards,
Steve.Thanks for all the helpful advice YI, you cleared up a few things for me
Kye
Young investor – Do you mind explaining a little further 'offset accounts'? I am also new. I do have a block of land and then a house that I am doing a subdivision for, planning on constructing in the back yard which will then become positive cashflow. A bit of extra knowledge would help.
Thanks
Sure Sasha.
For the purposes of this post, I will assume that you are living in the house as your principal residence.
The benefit of a 100% offset account is that any money you place into the account (which is seperate to your home loan account) offsets the interest that you pay on the loan.
For example, if you have a $100,000 loan, you will pay the same interest per year as if you had a $200,000 loan, with $100,000 in the offset account.
The benefits of this are as follows:
1. Easy access to your equity and no need to apply for re-draw which may take time or involve fees.
2. Preservation of the loan amount in case you decide to buy another PPOR and convert your current PPOR to an IP – The benefit here is that you can use the cash in the offset to buy the new place, whilst maximising the deduction on the existing PPOR which is about to become an IP – It is better to have more tax deductible debt, and less NON-tax deductible debt right?When combined with an interest only loan, this strategy is even more powerful as you can in a way "pay principal" into the offset account which reduces your monthly interest amount, but if you have a few tough months, then you only need to pay the Interest on the loan (not any extra principal).
There are a few posts across the forum which explain this concept a little more clearly and from a few different angles, but hopefully you get the general idea.
Regards,
Steve.With a P/I loan would having a offset account be a better idea than making additional repayments straight into your home loan account?
Thanks,
KyeIn short…yes!
If you pay money into your home loan (for a PPOR), and then try to re-draw later, the re-drawn funds are NOT tax-deductible unless you use them for an investment purpose.
So if you decide to rent out the current PPOR and move to a new PPOR, you will have a higher debt on the NON-deductible loan, and a lower debt on the deductible loan – This should always be the other way around where possible.
Let me know if this doesn't make sense and I will explain further.
I understand, and thankyou, When purchasing a IP is there any advantages to a P/I loan than IO with an offset account?
Kye
I can only think of two:
1. If you are not a disciplined person, then you may be tempted to spend the money in the offset. If you get a P&I loan with no re-draw then this problem is eliminated.
2. A lender that will not let you borrow more than a certain limit of facilities – This can be solved by finding a lender/bank manager that understands you, and if that doesn't work then a good mortgage broker will sort you out.
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