I am interested to know which is preferred….
When investing in property (or other things for that matter), is it better to go for an Interest Only loan or an Interest & Principle loan?
What are the advantages and disadvantages of either options?
When would you choose to use one over the other?
(eg, when there is no capital gain expected…)Are there are occasions when one is better than another?
etc…
Thanks everyone for your input!
Kelly
There are multiple answers to this. Though it depends what your goals are. If its an investment, I’d suggest interest only is generally the best option. If its to live in, it depends. You can either gear yourself higher, pay interest only and use all extra cash to go towards another deposit for another investment property, though none of the interest is tax deductible on your home. Or, you can pay interest and the principle and over time, reduce the size of the loan.
The best answer someone can give is to suggest you talk with a good accountant.
IO has the following advantages:
– reduced repaymentsThis means that you can pay extra off non deductible expenses first, and/or can invest in more investments.
Terryw
Discover Home Loans
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Yes I agree with Terry if you do interest only especially on investments it frees up the cash flow to pay off whats called dead money eg your owner occupied property. If there is no chance of changing the owner occupied to an investment property in the future it would be suitable to do P/I. on this property
Wayne
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First home buyers, investors, refinace, loan consolidation, equity loans, free service we come to you!Have used I/O on all my IP’s, since transferring my PPOR as an IP in 2004. This has in some part allowed to me to build up additional funds to be used as deposits for my other purchases since.
Used in conjunction with an offset account, it allows you to build a buffer and/or build for other deposits whilst reducing your interest bill. Alternatively you can always pay down the principal amount on your I/O loan if circumstances require.
Woodsman
And don’t forget, you could get a IO loan and pay extra like it was a PI loan, and then have the flexibility to stop the extra repayments at any point. You can’t do this the other way around.
Terryw
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Thanks guys.
If you were investing in something that expected no capital gains (ie a carpark or storage space for positive cashflow), would you still go with IO or would you want to reduce the debt?
I think the IO loan with the option of paying extra for the principle is a good option.
Thank you.
Hi
whether or not there are expectations of CG not really relevant. You would want to reduce non deductible debt first. Even if that is gone, IO would mean lower repayments which in turn would mean you could invest in something extra.
I guess the only time yo would want to pay PI is if that would be your one and only investment ever. Even then IO with the option of paying extra would be preferrable.
Terryw
Discover Home Loans
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Thanks Terry. That is helpful.
I guess then, if you enter a period of down-turn or higher interest rates, where it might be more important to reduce your debt levels, then you could always sell and repay some debt, or add in an extra bit to repay some principal.
Kelly
Hi guys,
Please keep in mind that not all banks/financial institutions offer 100% offset accounts and also the interest rate will be higher if you are doing IO with a 100% offset account.
Please feel free to correct me if I am wrong.
Cheers
PaulWith the same bank whether you have a 100% offset account makes no difference to the interest rate.
Many lenders do have no frills products with cheaper rates, but no offset. But these days most of the banks offer discounts on professional packages which brings the standard loans down to the same rate as the no frils, with all the added extra.
But there are some non bank lenders who do have very cheap loans without the offset accounts.
Terryw
Discover Home Loans
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Send an email to get my newsletter.Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
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