Hi Guys,
Quick question, as I’m just starting off…have not yet brought an IP yet. What’s the go with Interest only loans? How do you ever pay them off (if you do?) if you only ever pay the interest and not the principle?
Chriso (aka chrishall – changed my login!!)
Hi Chriso,
At the end of the loan term you either repay the entire principal amount or refinance the loan, it allows investors to make the minimum monthly repayments.
J
That makes sense. Is it common practise or is it just something mentioned in the books?
Chris, I would say it’s common practice. I can tell you that every loan of mine is IO, as is almost all investors that I know.
Cheers
MelMost IO loans are IO for the first five years only then principal payments apply.
An LOC is IO for the term of the loan.
Some folks aren’t too concerned with paying off the debt. They allow inflation to reduce it accordingly.
If my parents had never paid off their home loan they would still have a $30K debt on their Sydney home…..
Cheers,
Simon Macks
Mortgage Broker
[email protected]
0425 228 985Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
hi chriso[
]
Intrest Only loans are normally used for investment purposes whilst Principal and Interest loans are normally used for home ownership.
If an investment property is paid out fully whilst you are still working, it will cause your income tax payments to escalate and theroretically you could pay out more tax than you earn [at least it looks horrible using PIA Pro].
As the PPOR is not taxed then it is better in most cases to pay it out.
If additional funds or payments are deposited into an IO loan then this is taken off the principal.
Also by minimising repayments with IO loans, you can afford to increase you purchasing power.This is becoming important as affordability of property becomes more of an issue.
Whilst it may seem stange that you are never paying out the loan you will either obtain the benefit of cash flow [called positive gearing] or create equity in high growth areas for later investment use[using negative gearing] It is very difficult to obtain both.
Over a period of time and usually at retirment,one or more properties can be sold in order to pay out the loans as income tax is not as much of a problem if your investments are your sole income.This phase is termed consolidationRegards
Bryce Inglis
[email protected]
http://www.ipal.com.au
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