Michaelyes, most banks assess you on what your current repayments are. So if you are using PI loans you monthly repayments would be higher which would mean you have less money leftover to invest, and therefore less borrowing capacity.
Terryw
Discover Home Loans
North Sydney
[email protected]Hi to All,
My next questions would be why is what are the tax advantges of going with either of the options?
Is it true as long as your returns cover your cost you would be able to borrow even if you choose IP over IO option ?
[
]Hi to All,
What are the tax advantges of going with either of the options?
Is it true as long as your returns cover your cost you would be able to borrow even if you choose IP over IO option ?
[
]Tax advantages. The main advantage of IO is that, because principle repayments are not deductible, your outgoings onto the loan are 100% deductible.
ie if you go P&I your are not able to deduct the P part!
Small advantage only. I think most people choose IO as the lower repayments = higher cashflow.
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.
itsamoorey
I’m using 100k fixed and at the moment approx 60k variable on PPOR.
However Fixed the interest back in April on IP’s and paying IO for 5 years, as Simon aka Mortgagehunter say’s the interest is 100% tax deductible, the repayments are less ( freeing up my cash- handy as more can go on the non–deductible PPOR) the tenant, myself and the taxman pay for the property.
We thought rates would rise and our best option was to fix the rate, as an investor IO was also the better deal for our situation.We didn’t want to reduce the Principle ( no deductions)at this stage.
Also say for eg.. i have 100k ( and 100k equity)fixed for 5 years at IO, hopefully at the end of the 5 years the property has appreciated in value over this time frame.
Whatever you do depends on your personal financial situation and strategy.. keep on posting as there’s a wealth of knowledge available from people such as Simon on this site
MERRY CHRISTMAS TO YOU ALL
BACK AFTER XMASREDWING
Thanks Mortgage Hunter for the advice.
Speaking of IO loans most as i can gather is that you can only repay IO for 5 years and then you have to pay the prinicpal.
If i was about to make extra repayments from time to time while i’m on IO loan does that reduce the interest or Principal as well?
Just curious because if that is the case then i will be able to buy more properties and if i have any spare cash then make extra repayments and therefore reduce the interest or the principal.
Am i right or there is something else that i have to take into account as i’m unaware?
MERRY CHRSITMAS TO ALL !!!!!!!!11
[8D]
Michael you can certainly repay principal any time on IO loans. You may be able to re-negotiate another IO period at the end of your 5 years, or refinance if necessary (but this will incur stamp duty costs etc). You should also realise that there is effectively little difference between IO and P&I if you are in the higher tax brackets, owing to the net payments after tax being similar to inflation.
Regards, JimHi guys,
Redwing, so in effect if you have an IO loan and all of your repayments are tax deductable every single cent your paying onto the loan is a tax deduction. If you hold several properties on IO loans tax time would be a very nice time of the year indeed!!
I can understand why some people would prefer to just pay the P&I and until your post I thought the same but to make a serious start to my investing I’d probably be mad not to have the first few houses on IO as that would free up more monies for more properites… (as was explained very well by Mortage Hunter… Thanks!)
Okay,
thanks guys for all your input, I’ve now gone from definately P&I to most probably IO….[]Have a great new year!
itsamoorey[
]One of these days i’m going to put a good, funny, witty comment here.
Thanks Jim,
My problem is the deposit. And that is why i’m considering IO over IP becaue if i want to purchase 30 houses in 4 months i will run out of money very quickly! Im’ just planning to do that at the moment so i don’t get stuck and have to refinance and pay exits fees etc…
I wonder how Steve Mcknight done it as buy and Hold strategy at first and he purchased so many with little or no deposit!
[?][
]30 houses in 4 months…[
][][]Please share you strategy with us…[
][][]cheers
s.i.sHi everyone. I’m new here, and the whole IO thing is something I have thought about for a while, but can’t resolve. Bought Steve’s book a few days ago in Melbourne, and read it on the way back to the Middle East.
I’m predominantly looking in the NZ market, where the banks seem quite flexible on the IO thing, dependant on the property (some won’t do them on apartments). The two advantages I see are:
1. Less monthly cash outflow (therefore better chances of positive cashflow), and, depending on your mortgagor,
2. more (apparent) ability to service this or future loans.
The downsides would be that you have to eventually find the principal. This could be offset by being able to buy the property now, have CF+, and sell when the money is required.
Advantages in NZ are no stamp duty and no Cap Gains tax (someone jump in here if I am worng).
Seems like IO might allow me to more easily progress, and maybe do P&I on some, IO on others that might be ‘sellers’ in the future. No Stamp Duty means refinancing with another loan cheaper.
Or have I got it all wrong?
Kerry[
]Guys there is no doubt that Interest Only loans are considerably better than P&I loans.
Firstly there is nothing to stop one to make payments to the lender on one’s Interest Only loan just as if it is a P&I loan.
There are several advantages.
Firstly by paying more than is required on an Interest only loan one (usually) is able to redraw the extra payments which have been made if at any one time one finds oneself under a bit of financial stress.
I have seen someone who had a P&I loan and, through no fault of his, he ran into financial difficulties.
As a result he was a few thousand dollars in arrears and under threat of being sold up by the bank !!!
If he had had an Interest Only loan instead of a P&I loan and if he had made payments as if he had a P&I loan he would have been able to avoid getting himself into trouble with the bank by redrawing the additional payments he would have made.
(An offset account would also achieve the same result).
Secondly, many people have a credit card and I read somewhere that the average debt per card is about $ 5,000.
If one had an Interest Only loan instead of a P&I loan one could use the spare money which one has left in one’s pocket each month and pay off one’s credit card debt.
This means that one can avoid the 15% interest (or more) being charged on one’s credit card.
On an average credit card debt of $ 5,000 this means a saving of perhaps $ 400 per year.
Not a lot of money ? Hey, how many times can one take one’s wife out to dinner with that kind of money ?
And in an emergency with no debit balance on one’s credit card one has access to some emergency funds as well.
Pisces133
Pisces,
Yep, I agree… IO seems to be the way to go with possible refinancing after the 5 years, either going to P&I with a view to holding onto the property or maybe just selling for the capital gains on the property? I guess it depends on each persons strategy, I’m curious as to what Michael posted about steve not recommending IO… why I wonder??
Anyway, I’m looking at two properties at the moment and am about to consult with Mortgage Hunter, he seems to know his job and also appears honest, a rare trait nowadays.
happy new year all, thanks for your input.
itsamoorey[]One of these days i’m going to put a good, funny, witty comment here.
One can always look at things from a different perspective so, yes, I would be curious to learn what the reasons are for some others to prefer P&I.
The only reason I can think of at the moment is that for P&I the LVR may possibly be a bit higher in certain cases.
Pisces133
Hi Guys,
What ive learnt and seen is, that for your PPOR, IMHO, you are better to have a I/O loan, and pay your debt down as much as your possilbly allowed too by the bank. (Most banks only allow you to pay an extra $10k a year on top of your I/O, anymore and be penalised)
Though if you are just using a buy and hold stratgy and waiting for the right time to sell, then it would be more advisable to use a I/O loan…. But why sell?
For me personally i prefer P/I loans, the reason being is, you can service your equity to purchase more properties, than rather sell. (While at the same time, pay your loan down, but also have access to more funds).
Really Structure your loans to what type of investment stratgy you are planing to use… and stick to that plan.
But there are also some other packages that are more benfitable by reducing your loans a futher .25% and more, to give you more access to cash, funds and movement of cashflow.
cheers,
s.i.s
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