I’m a little confused when it comes to mortgage repayments plans. Some are repayments of principle only and some are principle + interest.
What’s the diff here and what’s in it for us?
Most lenders offer P&I or IO loans.
The primary difference as regards IP’s is that with IO you are maximising the deductibility and reducing the cashflow out on the property.
The downside is that your debt wont reduce during the IO period however this may not be an issue – depending upon your strategy.
There is a new loan that will apear on the market soon which is PO. This will be of great interest to home owners as it reduces their repayments considerably. They had no interest tax deductions anyway so it really cuts the repayments by half.
All the best,
Simon Macks
Mortgage Broker
http://www.mortgagehunter.com.au
0425 228 985Todays Hot Rate
***3 year fixed – 6.49%***Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
Simon,
Can you give us more info on the PO loans soon to come out? How do the lenders make money if they aren’t charging you interest? Surely there has got to be a catch (large on-going fees, etc…)?
Regards,
OziDo a search on the word “derivex”.
There is a thread here that discusses the PO loans and one of the early messages in the thread links to the SS forum which has a bit more detail.I won’t bother with the description of how they make money because;
a) It is covered on the threads I mentioned above
and more importantly
b) I still don’t really understand it [blush2]Regards,
ClintThanks Clint! I’ll check it out.
Simon, to paraphrase it, does it mean that with IO loans, I’m maximising my cashflow?
The downside is that your debt wont reduce during the IO period however this may not be an issue – depending upon your strategy.
Why’s this so? Is it because I’m paying off all my interest on the loan paying actually paying off for the principal borrowed?Hi FC.
If your repayments are interest only, the principle will not reduce,
E.g., $200.000 loan, interest only, 10-year term,
After 10 years of interest only repayments the balance remaining on the loan will remain at $200.000 Hope this helps,Regards
Steven
Mortgage Broker
Mobile Mortgage Market[email protected]
http://www.mobilemortgagemarket.com.au
Ph:0402483216
Ph:1800 820 500
VICTORIAPLEASE note comments made should not be taken as specific taxation, financial, legal or investment advice.
Steven, thanks for answering that for me.
I’ll like to use an example to see if I actually understood that.Based on a $200k loan at 10% interest (5 years), I’ll be paying the $20k interest amortized over 5 years. After the 5 years, I’m left with just the principal to clear …. Right?
Hi FC,
You are nearly there,
With interest only repayments the term is irrelevant, but based on your example of a $200K loan at 10% your interest only repayments would be $1.667 pm = $20.004 per year.
So lets assume you have an interest only term of 5 years, after 5 years you would have made in total $100.020 in interest only repayments,
Keep in mind, at the conclusion of your interest only loan period, (in this example its 5 years) you will still have a remaining debt of $200K,
in most cases you will have the choice to either negotiate another interest only loan period, such as 5 or 15 years etc, or commence principle and interest repayments on the $200K loan,Regards
Steven
Mortgage Broker
Mobile Mortgage Market[email protected]
http://www.mobilemortgagemarket.com.au
Ph:0402483216
Ph:1800 820 500
VICTORIAPLEASE note comments made should not be taken as specific taxation, financial, legal or investment advice.
Steven, I still don’t get something here. Why am I only paying around $20 a year?
Isn’t it 10% of $200k -> $20k (interest)
$20k / 5 years??
Hi FC,
It’s not $20 per year, its $20.004 per year. (Twenty Thousand and Four dollars)
I hope this helps,
If your still not quite sure, keep asking, that’s what this forum is for, cheers.Regards
Steven
Mortgage Broker
Mobile Mortgage Market[email protected]
http://www.mobilemortgagemarket.com.au
Ph:0402483216
Ph:1800 820 500
VICTORIAPLEASE note comments made should not be taken as specific taxation, financial, legal or investment advice.
Ok yet I’m a little confused now.
I’ll be paying $20004 per year for 5 years???
And that is interest only? And why the 4 dollars?Hi FC,
$200K loan at 10%
Interest only repayments = $1.667 per month x 12 months = $20.004 per yearRegards
Steven
Mortgage Broker
Mobile Mortgage Market[email protected]
http://www.mobilemortgagemarket.com.au
Ph:0402483216
Ph:1800 820 500
VICTORIAPLEASE note comments made should not be taken as specific taxation, financial, legal or investment advice.
I think FireCaesar is getting P and I crossed over a bit.
Let’s try this one for a different way of looking at the issue;
When you pay interest (eg at 10%), what you are really saying is “10% per annum”, or in other words, 10% of the total amount is paid back every single year.
Therefore, on $200,000 you would pay 10% of this ($20,000) every year on an interest only loan.Theoretically, you could keep paying this amount idefinitely. For example, if you had the loan for 100 years then you would pay $20,000 per year for every one of those 100 years.
Think of it as a “rental” amount on being able to use someone else’s (the bank’s) $200,000.
If you compare the $200,000 to something more “solid” like a boat. You can go to a charter company and hire a boat for $200 per day. At the end of the day you have paid $200, used the boat but ultimately don’t own anything. You could hire the boat for 100 days, pay $200 each day and still not own it at the end, because you are just renting it.
What the P&I does is it makes you pay back the interest component as well as a portion of the Principal as well, thus you get to “own” the $200,000 at the end of the loan term.
What it means is that for an IO loan you would pay back $20,000 per year and have nothing left to show for it and the end of 25 years, but with a P&I you would pay back the $20,000 + some principal each year and would own the full principal ($200,000) at the end of the 25 year loan period.
Which one you go for depends a whole lot on your individual circumstances.
Anyway, let us know how you go with these concepts.
regards,
ClintFire, don’t worry about the $4. It is only a rounding error. It is $20,000 a year.
200,000 x 10% = 20,000 per annum
20,000 / 12 = 1666.66 per monthThe discussion would even confuse me so far. I hope the following helps. There are three types of repayments. These are P&I, IO and now PO.
P&I – principle and interest
IO – interest only
PO – principal onlyA P&I loan is the standard type loan for those who are not advised better. The minimum monthly loan repayment will ensure your loan is paid to zero over the term of the loan – usually 30 years.
An IO is used by those who have no need to pay off the principle. Investors often use these when they have another debt that is not deductible like their home (PPOR). They are also used when an investor is seeking tax deductions. I personally like all my clients to have their loans as interest only for many reasons I won’t go into here. The downside with these is that if only the minimum payment is made, the loan will never reduce.
PO loans are new and complicated. Basically, all your repayments are principal payments and reduce your loan. There is never any interest payments.
An example:
Loan Amount = $200,000
Interest Rate = 6.5%
Loan Term = 30 YearsMonthly Payments
- P&I Payment = $1,264.14
- IO Payment = $1,083.33
- PO Payment = $555.55
I hope this clears this up.
Robert Bou-Hamdan
Mortgage AdviserM: 0414 347 771
E: [email protected]
W: http://www.mortgagepackaging.com.auComments made are of a general nature and should not be construed as individual advice.
© 2004 Mortgage Packaging Pty Ltd
Steven, thanks for your last bit. I know you were trying to get me to understand. However, your last post still left me slightly confused.
With Clint and Robert’s explanation and perspectives, I get it now.
Really thanks to all your contributions (Robert, Clint, Steven, Simon).
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