I have constantly read to take out an IO loan for Investment Properties. I am on the verge of buying my first IP, but have just read an article somewhere that say IO is not always the best way. It said usually the people that get IO loans sell before the term (5years) is up. It had a table that showed if you held the property for the life of the the loan and had an initial term of IO you will be far worse off. I am buying a unit and plan to hold onto it long term. Should I still go IO? I will probably get a loan for $300,000, with a 5% deposit, and rental return will be $350pw. Rates/water/strata will be just under $3000 per year, and I dont think there is anything else to claim except real estate agent fees.
Hi there
Hopefully this should answer your question – it's a blog entry regarding whether to opt for IO or P&I.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
I actually remember coming across this last week on one of my many hunts for information. The article relates alot to PPOR, of which we do not have (living rent free in a family home – alone!).
Also, is it just assumed by all discussing IO that it will only be for 5 or 10 years, After which you start paying P&I? Or are people doing IO for longer than that?
I am considering there way be some value to go IO for a few years to ease any financial pressure in the pursuit of buying a second IP…Regardless if it's a PPOR or an IP – interest only with offset will provide maximum flexibility in the future and achieve the same outcome of a P&I loan. If you're a lousy saver, have no other deductible debt and don't plan on ever purchasing a PPOR in the future than P&I might be suitable for you (but this is a rare occurrence).
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
How can it be the same outcome when you are giving the banks an extra few years of interest payments….or are you saying that becuase the tennant is covering the IO payments thats why your not worse off…?
Hi Renel
By utilizing the offset account your net interest repayments are the same whether you take an interest only or principal & interest loan.As Jamie mentioned if you think you won’t be buying a PPOR anytime soon then yes a P& I maybe the way to go.
It is something I will be covering on my Investor nights I will be hosting around Australia starting in Melbourne.If you want a copy of my API interview giving some insight into how I built up my portfolio then send me PM or email.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
The idea about paying interest only on investment or tax deductible debt is when you have or plan to have non deductible debt. So any principal payments would be paid into the non deductible loan and reducing that before paying off any deductible debt. If you dont have any non deductible debt at the moment but plan on buying a PPR in the future then still keeping the payments as interest only and having an offset account where extra funds can go into is a good idea as you can then take the surplus funds out in the future with out losing the maximum deductible interest.
JonHi all,
Firstly; fantastic website… an absolute wealth of knowledge, ladies and gents.
I will be looking at an IP loan in the future and have been reading up on the IO/Offset strategy.
My question is how long are interest only loans good for?
My bank/co-op states:
^Interest-only option applies for owner-occupier and investment purposes (no principle repayments) and is available for loan terms 3 to 5 years.
Is this the norm? What happens after the 5 years — does it revert to P&I? Can you refinance as IO every 5 years?
Cheers
Hi there
The IO term depends on the bank and generally range from 5 to 15 years.
When the IO term expires it's usually (I say usually) easy enough to role them into another IO term.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
Hi Renel,
Not a broker so take what I say with a grain of salt.
In your situation (no PPOR) it is even more important you take out an interest only loan with offset account. Most people, not all, end up trying to buy a home at some stage in their lives.
Many who travel down the path you are taking by buying an IP first then want to release and use the equity in their IP towards their PPOR thinking this is all deductible. Unfortunately this is not the case with the end result being a larger than necessary level of non-deductible debt. This is not ideal as you should be trying to keep the non-deductible debt as low as possible.
The other point I would add – even if you do want to pay off the loan it is advisable to take the loan out as if it was I/O but you make payments as if the loan was P & I.
As stated above I/O with offset is better but if you are committed to paying off the loan this may be a better option as it gives you increased flexibility if the wheels fall of your life sometime in the future.
Flexibility is one of the greatest allies you can have as a property investor – try not to lock yourself in.
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