Hi All,
My sister is in the process of purchasing her first property and was wondering what’s the best way to go. She has spoken to a few financial people and some say best to go P&I and others say IO & Offset. She plans to live in it for 6 months then rent it out.
Thanks for your advice guys,
[biggrin]
Hi as she wants to use it as an investment property in the long term it is probably best to go interest only to maintain cashflow.
She can then make additional payments if she gets a redraw or an offset with the facility.
All in all it depends on her current financial situation and what her goals are in the years to come to make an adequate assessment.Kylie S
Mortgage Consultant & Property Investor
0412614965
[email protected]There is no question about it if she intends to do as you set out she should take out a interest only loan with a 100% offset account.
This will give her flexibility as her circumstances change.
Not all lenders offer such a product and many dont offer a full 100% offset account or do not calculate the offset interest on a daily basis.
Your Mortgage Broker should be able to point you in the right direction as it is likely that additional IP purchases maybe in Trust name rather than her personal name.
Cheers
Richard Taylor
Residential & Commercial Finance Broker.
Licensed Financial Planner. Ph: 07 3720 1888
[email protected]
Looking for life cover – We Guarantee to beat any quote you have in writing.Richard Taylor | Australia's leading private lender
Interest only, definitely.
IO with offset is what I would do in my situation. Especially if the plan is to rent it out.
If any broker suggests P&I in this situation you shoulkd move onto a new one.
Cheers,
Simon Macks
Residential and Commercial Finance Broker
[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.
So most of you are saying IO & Offset.
We are in the same boat but was told to take out an P&I too by our broker. We intend to live in it and then rent it out in a years time when we go back to the UK.
Would a IO & Offset be better for us do you guys think and what are the advantages of having an IO & Offset compared to the P&I? Is there a tax benefit or something?
Cheers guys,
Ems[biggrin]My 20 cents.
I would go interest only in your situation also.
The benifets of IO over P&I are numerous. Firstly, holding the property costs less. When you pay back the principle on an investment property only the interest payments are tax deductible.
Either way you go have a great time in the UK.
Hey Ems,
Good question as this is exactly the same plan as ours and the same decision we are trying to make.
Everything I have read over the past couple of years points to interest only. This is also what a couple of mortgage brokers that we have seen have adamantly suggested.
What I am not 100% sure about is…they seem like the same thing – that is, if we were to hypothetically pay $100 interest and $100 off the principal (P&I repayment) as opposed to $100 interest and $100 into the offset account (I only repayment) it would still calculate the same interest charges for that day/period in either situation…is that how it works?? Then the advantage of the interest only scenario would be that after a given amount of time we could then decide to either make an early repayment with the saved up lump sum (may incur some costs) but not be much worse of then if we had be actually paying the principal the whole time OR we could take it out and use it for a deposit or renos etc…is that how it works??
Thanks for the help,
Peach[biggrin]Hi Peachy,
I agree totally and don’t know fully why it would be best to get an IO & Offset. They do seem like the same thing – $100 interest and $100 off the principal (P&I repayment) as opposed to $100 interest and $100 into the offset account (I only repayment) it would still calculate the same interest charges for that day/period in either situation…is that how it works??
HookhamC – You say holding the property costs less. When you pay back the principle on an investment property only the interest payments are tax deductible. So if we had an IO & Offset then can all payments be tax deductible?
With the P&I am I correct in saying only the Interest is tax deductible but with the IO & Offset both are tax deductible? If so this is the only advantage I can see. If anyone can help us out that would be great.
Cheers guys,
Ems[biggrin]
Only the interest is ever tax deductible.
With an IO & Offset you can reduce your interest when your money is idle, but have instant access when needed for the next deal.
P&I loans limit your further investment strategies. Once you paid any money off the principle it is gone for this loan. In order to redraw you would need a completely new loan.
I agree that IO with an offset is the way to go. Mainly for tax reasons. Maybe an example with explain it better.
e.g.
You have a $100,000 loan. after several years of paying PI the balance is now $50,000. You want to buy a $50,000 ticket to travel around the world. So you withdraw $50,000 from your home loan, bringing the balance to $100,000. But this new borrowing is not for business, but for personal use. So only the interest on $50,000 is deductible.Or
You get a $100,000 IO with an offset. Instead of paying PI, you pay the same amount into the offset account. the interest is direct debited from this account monthly leaving a growing balance. After several years this gets to $50,000. Since you have $50,000 in the offset you are only paying interest on the balance of $50,000.
Up to this point these two scenarios would be the same in terms of interest charged.
Now you go and buy your $50,000 ticket (must be first class) and you take the money from the offset. Your interest payments will then go up again. Since you have not borrowed any additional money and have not paid down the loan or withdrawn any money from the loan the deductiblility of interest would not change. So you can now claim the interest on the full $100,000 as a deduction. You have effectively had a tax deduction for borrowing to have a trip around the world.
Sorry, that was a bit of a long example!
Terryw
Discover Home Loans
[email protected]
Send an email to get my newsletter.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
I agree with how Bridgebuff has put it.
The real question is, what is your goal?Is it still wise to get an IO loan on an IP that you plan to hold for the long, long term? Don’t you have to pay something off the principle eventually?
Again it is dependant on your long term goals.
If you have no personal non tax deductible debt whatsover and intend to hold the property and live off the rental income then sure consider paying down some principal but remember the principal compenent of your monthly repayment could be used to cover some of the interest on your next IP.
As a famous jockey once said it is horses for courses.
Cheers
Richard Taylor
Residential & Commercial Finance Broker.
Licensed Financial Planner. Ph: 07 3720 1888
[email protected]
Looking for life cover – We Guarantee to beat any quote you have in writing.Richard Taylor | Australia's leading private lender
Thanks TerryW,
That is what I was trying to say and get confirmation on – but you just said it soooooo much better and made it soooo much clearer…could be the extra 5k or so posts you have on me (oh and a fair bit of experience too). [wink2]
Peach
I think it all depends on your goals. If you want to take a holiday in a few years then terry’s example makes perfect sense. If you want to purchase another IP then paying off some of the principle can’t be a bad thing because then you will have equity to purchase your next property. Whether it’s cash or equity is amounts to the same thing. Having equity means you can borrow 100% plus fees if necessary and claim a tax deduction on the new loan. Having cash means you borrow less fo rthe new property but at the end of the day your total debt will be the same.
Am I wrong?
I like terryw’s explanation. It was good and clear.
The thing with paying off principal is that yes, you can borrow the equity, but either you need to get a second mortgage on the place, or have a new bigger loan. It all costs fees and mixes up the money. If you take the deposit for the new property from the offset account you may even have over 20% and save on mortgage insurance, which can cost a fair bit. Don’t forget mortgage insurance is not for you, you never get a cent, only the banks if you default.
The IO & offset seems so simply the best and most flexible. Sure you eventually have to pay back some principle, but IO allows your money to work better. If you are finding this principle difficult then you just need to take a deep breath, walk away, and come back and read it all again. Or read lots more books, or go to your accountant. Beware of the mortgage broker giving you financial advice, do they have a financial advisor’s certificate and are fully registered, or are you getting the best loan for them to get the most commissions and trailer fees. Why not ask the kid next door. If you want free advice, be prepared that it may be worthless (or cost you money in the long run). Toss a coin, really. If you want P&I then just do it for yourself.
Sorry, but sometimes people ask and then don’t want to hear any other answer but what they wanted to hear.
kjs
Kjs, we’re here to learn and are warned enough times in the forum to back up opinions with qualified professionals with expertise in properties.
I cannot underestimate MB opinions. Loan features are constantly changing as well as the rigid tax compliance issue to boot. Where do you turn Kjs? Reading this thread alone said a lot…
Afterall MBs are the expert in their field.
CT
Originally posted by ctaing:Kjs, we’re here to learn and are warned enough times in the forum to back up opinions with qualified professionals with expertise in properties.
I cannot underestimate MB opinions. Loan features are constantly changing as well as the rigid tax compliance issue to boot. Where do you turn Kjs? Reading this thread alone said a lot…
Afterall MBs are the expert in their field.
I think his point is valid and important. This industry is full of ratbags and well intentioned amateurs who both give suspect advice.
I believe the regular Brokers (cept me of course [biggrin] ) on this forum give good advice in the most part and will decline to give too much detail where they don’t have the full situation. Accept what they say as a generalised truth but consult them individually for specifics in your case. If a broker like Terry or Richard cannot help then they will suggest an accountant or solicitor who can.
I do try to keep down the number of fly in brokers who simply are trawling for business and actively delete any post they simply asks you to call them for all the answers …
CT
[blush2]
Simon Macks
Residential and Commercial Finance Broker
[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.
MBs are expert in their field – maybe, and that field is not financial advice. Some of them are not even expert at being a MB. To be proffessional you get paid, but some get paid even if they know next to nothing.
I have a friend who had done a several monday morning course, and purchased a program from a particular MB company. Then they let her loose on unsuspecting inoccents. Go and distribute leaflets in your suburb was the next part of her training.
Sorry, there may be some very wise MBs, including those here, who I think would know more than the average, but there are a lot of MBs who certainly have no accounting or tax knowledge. My point in case, the lady that asked the first question. Her MB advised a P&I. With what background or knowledge of her situation? Good on her for coming here and asking more questions.
I apologize if I sounded critical, I did not mean to be negative, just that if you trust blindly the advice of a person that has no legal right to give it, then you will end up possibly not getting the best from your finances.
Cheers, and keep the good advice coming!
kjs
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