Hello all,
Apologies if this is rather basic, but which is the best mortgage do folk recommend for 1st IP? Many recommend IO to reduce cashflow initially, but I don’t understand how that builds equity to buy further IPs if you’re not paying off any principal. Are you relying then on CG, in which case this would seem to be quite a long process, waiting to CG to increase the equity in your IP before going for the next one.
Thanks for your insights.
*** Trust but verify ***
Ive heard different opinions on this also. IMO I think you should evaluate your goals and what it is your trying to acheive. And borrow accordingly.
Me I would repay P&I.
1. It has been explained to me that banks look on this favourably in attempting future finance as your track record shows the debt being reduced.
2. as part of my investing strategy It would have a predetermined outcome. And that is it would eventually pay itself off. Not be left in limbo.Cheers Thomas
Unfortunately the banks certainly dont look more favourably on a future loan if your existing payments on another IP are P&I rather than IO.
It is all based on serviceability. often a P & I loan can work against you as the costs of your monthly repayments are higher.
You would certainly never recommend to a client to take a P&I loan on an IP whilst the client still had non tax deductible debt on their PPOR.
My preference is IO with an offset account however each client has different goals. If you would like to repay the debt and then gear up again and use the rent to reduce other loan repayments then consider a split loan between P & I and IO.
Remember when pating IO you will have greater disposible income and this will help fund other investments.
Cheers Richard
Ph: 07 3720 1888
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http://www.yourstatefinance.comSpecialising in US & IP finance.
Richard Taylor | Australia's leading private lender
I would suggest IO with an Offset.
This allows you to “pay down” the loan into the offset thus creating a deposit for the next property along with CG. CG can be speeded up by adding value and by using a lender that actively seeks favourable valuations in order to win your best loan – most brokers will have a lender like this up their sleeve!
Best of all it frees up the extra principal for you to use for any purpose. If you had a financial disaster, job loss, illness etc you can access your equity for personal use and still allow the total loan to be tax deductible.
If you have a spouse that doesn’t work then I suggest IO with your “Principal repayments” going into an account such as IngDirect’s great product. This is even more tax effective as it allows the deductions in the higher tax payers name and the interest in the lower taxpayers name.
I think that paying P&I on an IP (when your goal is to buy multiple IP’s) is purely a comfort decision. Comfort decisions are important when you first start out but please understand the difference between a practical and emotional decision.
I hope this provides some food for thought.
Cheers,
Simon Macks
Residential and Commercial Finance Broker
***NODOC @ 7.15% to 70% LVR***
[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.
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