Could someone please explain to me the difference in an Interest Only Loan & Principle, for an investment property.
Why do they say its best to take out an I.O loan, what are the benefits, does it have anything to do with tax benefits?
I would really appreciate your help, cheers!
Because:
When you pay PI you are paying down the loan. This involves extra repayments. This will reduce the amount of interest you can claim on your tax for an investment.
Instead, if you use a IO, the repayments will be lower. The extra money can then be diverted to reducing your home loan faster. This is beneficial as it is non deductible debt.
Terryw
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Parramatta
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IO – Interest Only is that you are paying Interest Only and none of the Principle.
This is good if you have any non deductible debt as Terry said.
Paying IO will allow all your spare funds to pay off that debt first.
If you do not any non deductible debt then paying of with P&I will allow you to get equity and with growth you can borrow for further investment.
ChrisAll post are IMHO.
My parents just took out an interest only loan and are aiming to have their property paid off in the next two years? For a brand new 300,000 house they only have to find $170 p/w extra. They have a PAYG tax and rent is guaranteed at $200 p/w for 5 years and the remained is $170 p/w. Which means there house would need to appreciated at ~3% per year to break even.
Other than if you are paying a non-tax-deductible debt is their any other advantages of using an IO loan??
Cheers
Paul[suave2]Since the repayments are less, if you could invest elsewhere with a higher return on the money you save, IO may be beneficial.
Terryw
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Parramatta
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I’ve wondered about this same topic myself. I understand that by paying IO then the repayments will be a lot lower which is great but the down side is then going to be the fact that you will never therefore own the property.
What happens when you finally make the last repayment of the IO loan? Does the bank own the property?
Your loan is only interest only for a fixed term, commonly 10 years. at that point, it then reverts to Principle and interest for the remaining 20 years, (or whatever the loan was taken out over) until at the 30 year mark it is paid off, and you own it. of course, it is ‘hypothetical’, in that who knows what you, the property or property prices will be doing in 10 years time? Some popular options are to sell, refinance, or renegotiate after the initial interest only period is up, of course hoping that it has significantly increase in value. if it has not, it was bought poorly and you are in a spot of bother……..[thumbsupanim] All the best
Many people keep refinancing back to IO loans at the end of the IO term. A good option is to get a 100% offset against your loan so you can store excess cash there until you need it. This helps reduce interest without having to pay off the loan too.
Also, with IO, it may not really matter in the long run (if property keeps rising). Imagine if you bought a $16,000 property in Sydney 30 years ago. It would now be worth about $800,000 – one years rent would pay that loan off, it you had kept refinacing at the end of each term.
Terryw
Discover Home Loans
Parramatta
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Just send me a blank email, with “subscribe†in subject line.Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
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