Where when and why do u use an interest only loan.I,ve just finished reading 0-130 and noticed Steve used an interest only loan on some commercial deals.
Ideally if you have a home loan then every business or investment debt should be IO until the home (read non-deductible) loan is paid out.
End of story!
Simon Macks
Mortgage Broker
http://www.mortgagehunter.com.au
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 Simon
So, you are saying that if we own our PPOR we are best to go with P&I?
Kind Regards
Les[
]What if I dont have any loans to start with and wish to purchase a commercial property.
xxx
Les,
In your case it is very much a personal choice. Do you want to pay down the loan or use that portion of the cashflow for something else?
Russ,
Once again it is up to you!
Cheers,
Simon Macks
Mortgage Broker
http://www.mortgagehunter.com.au
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.
What I don’t understand about IO loans is why people would choose only to pay off the interest and none off the Principal??? Is it because they are only looking at paying off the interest for a certain amount of time and they are actually looking at selling for CG in a few years time?
It’s all very confusing when we are only “LEARNERS”! LOL
Les []Hi Leswon,
There are a number of reasons why I use I/O for all of my investment loans.
1) I use I/O only loans so that I can driect all of my spare cash into paying down my own home loan as quickly as possible.
When the home loan is paid off then I’ll consider my options and explore the costs and benefits and options of paying off/down some IP loans (or not).
2) Bear in mind that P & I loans, in the early years, have little impact on your overall debt levels as most of the payment goes towards the interest bill anyway.
3) A I/O payment is less than a P & I payment. On a $100K loan @7% over 25 years your monthly repayment is around $706. Interest only basis it’s $583.
Compound this over a number of properties and the cashflow difference is significant, to such an extent that it is possible to hold more in total asset value using I/O loans as against P & I loans.
That’s what, and why, I am doing what I’m doing – in some respects it will get down to your plans, the approach you use and the properties concerned.
Derek
Hi Derek
TY for your reply. So, can an IO loan be changed to a P&I loan after a certain time. If so, all money already paid towards the IO will also be taken into consideration and deducted?
Les []Hi Leswon,
Loans can be altered fairly easily from I/O to P & I without any drama. I suspect the ‘bank’ would love you to change to P & I loans as they will reduce their exposure to you, and the loan is being paid off, albeit slowly.
“If so, all money already paid towards the IO will also be taken into consideration and deducted?”
There are no deductions to be made. If you have an interest only loan of $100K – you will still owe $100K as such all the payments made up until that moment only cover your interest bill.
So your P & I payments will be based on the full $100K loan.
Derek
Well Explained Derek!
I also prefer IO loans.
Cheers
[]
PropertyGuRu
I want to be billionaire! [] That was very informative thankyou Derek.[
]Russ.
Derek is a very smart property guy!
You won’t go too wrong listening to his opinions!
Cheers,
Simon Macks
Mortgage Broker
http://www.mortgagehunter.com.au
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.
Hmmmm,
This is all very confusing – or I’m really THICK, LOL!
So, hypothetically, if i have an IO loan for say 2 years and want to swap to a P&I loan after this time, all of that money that was paid towards the interest just becomes “dead money”?
So, the whole idea of getting an IO loan is to just have it for a short time and then sell the property for CG?Sorry Derek! This will all just FALL INTO PLACE for me one of those days. Until then, I’ll just keep reading and asking questions.
Thank you for your patience.
Les []Hi Leswon,
In a round about way interest only could be considered ‘dead money’ as you describe it.
You need to change your mindset about CG – you do not need to sell the property to realise the gain. It is possible to release the equity for other investments and/or cash. Ultimately it depends upon your investment philsophy.
To give you an example – assume you bought a typical, median priced property in Perth in 1970 when they were $16000 and held it using interest only loans up until now when the median price in Perth has just reached $236000.
Your debt remains at $16K and over the 34 years you have held it you have paid around $49K (all tax deductible @ $28/week) in interest on an asset that has increased in value by $220000. At the same time the median rent has increased considerably and would be making this asset positively geared.
While $16000 was probably ‘expensive’ 34 years ago – today it is a little more than petty cash.
Obviously in this example there is no consideration for repairs etc but I hope this clears up the benefits of interest only.
Derek
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