Ok, this might sound silly, but I am still a newbie to the property game. Can someone explain what exactly an interest only loan is? I realise that you only pay the interest each week off the loan, but what happens if the loan ever made it to 25 years? Do you have to then payout the principle? Can someone explain the pros and cons of this type of loan?
K
Hi kalebball,
With an interest only loan, you pay only the interest on the mortgage in monthly payments, usually five to fifteen years, After the Interest Only period, you either refinance, pay the balance in a lump sum, or start paying off the principal.
Regards
Steven
Mortgage Broker[email protected]
http://www.mobilemortgagemarket.com.au
Ph:1800 820 500
VictoriaPLEASE note comments made should NOT be taken as specific taxation, financial, legal or investment advice. Please seek professional, specific advice.
hi Kalebball
I use IO on my IP’s at the moment..
Why ?The payment is less, meaning more available ca$h to go into our PPOR, and repayment ability on IP’s is eased, i owe $80k now and in 5 yrs time i still owe $80k, but the IP may be worth $130k.Also the interest is the Tax deductible portion, at this stage i want to reduce my ‘non’ deductible debt ( PPOR ) I’m not to concerned at the moment about paying off the principle of my loan, possibly i’ll reduce the loan amount when i re-finance in 4yrs
Note– My IP’s initially – geared, due to “growth” recently and good rental ability, they are + geared..
REDWING“Money is a currency, like electricity and it requires momentum to make it Effective”
What happens to the $80 thousand once you’ve got to start paying that off? Is that just straight pure cash money that you then owe the bank?
What’s the arrangement usually made with the bank? Is it over a set period that you begin to pay it off?
I don’t understand your Q’s jaffasoft, so I’ll have a crack at it.
After the 15yrs, you can refinance the loan (get a new I.O. or P&I loan), or pay off the $80K. But either way you will have to lump up $80K to the bank (unless you refinance through them).
Rgds.
Lucifer_auHow much less per month(depending on loan of coarse) do you pay with IO loan ?
Hi Dave,
The difference in repayments will depend on the loan amount, interest rate and the term of the loan,
Below is as an example on a $200.000 loan at 7% over 15 years
Interest only monthly repayments $1.167
Principle & Interest monthly repayments $1.795
Regards
Steven
Mortgage Broker[email protected]
http://www.mobilemortgagemarket.com.au
Ph:1800 820 500
VictoriaPLEASE note comments made should NOT be taken as specific taxation, financial, legal or investment advice. Please seek professional, specific advice.
I havent had a chance to reply to this.
But i still don’t get this!
So if you have 80,000 left to pay the bank, is re finance when you take another Interst Only loan out so basically you do what you started with but ya go around again? Basically prolong what you owe.
So you could be indeafinantly be paying of the $80,000?
Unless you pay it all out of coarse with the benifit of capital gains.
Originally posted by Jaffasoft:So you could be indeafinantly be paying of the $80,000?
Yes… I’d rather put any ‘spare’ money into my non-deductible loan on my PPOR, also quickly reducing the loan ‘and’ building my equity, does it worry me that i’m not reducing the principal part of the loan “NO”[biggrin]
As to paying it out with the capital gains..I’m not looking at selling.
Rents increase and the IP over time becomes more + geared, when i renew the loan “i may” if i wish reduce part of the principal then, say i renewed loan every 5 years and on that renewal, ipaid $5k off each time and ‘whittled’ the loan down that way..
REDWING
“Money is a currency, like electricity and it requires momentum to make it Effective”
Count The Currency With This Online Positive Cashflow CalculatorSo you could be indeafinantly be paying of the $80,000?
Yes. It what many people do, I plan to do it forever…
Rgds.
Lucifer_auJaffasoft,
Think about it in a different way.
You are paying a charge to use the bank’s money.
At the end of the loan you still own the original amount of money, which you can continue to pay a charge on, or pay out (somehow).
If you pay it out you end up with your cash being tied up in the property – to get it out you need to either sell the asset (and lose the future CG & rent) or refinance it with a bank – and pay interest on the loan.
So why bother paying out the original loan in the first place!
In fact, as the property increases in value you may wish to pull out more money from the property and INCREASE the size of the loan….
Cheers,
Aceyducey
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