Hello
I have never had an IO loan before and wondered whether it was allowed to repay some principle on this sort of loan. Is it just a matter of repaying more than the interest for the month and the rest gets deducted from the principle?
Thanks in advance
ElkaCheck with the lender or mortgage broker you used to see if you can pay off any of the principle amount or is there a restriction on the amount per year you can pay off the principle.
Generally any extra repayments on a interest only loan reduces the loan amount and goes into redraw. Extra funds can be withdrawn out of the loan up to original loan amount borrowed.
This is a general answer and its highly recommend you consult your lender or professional financial advisor in regards to your individual circumstances/loan as noted above.
Hi Elka,
I/O loans work slightly differently (in general) from a P&I loan, in that the interest is automatically deducted from your nominated account once each month, it is not a payment 'you make' as such, or a direct debit as such. So all that is charged essentially is interest. In most cases you can indeed make a lump repayment off the loan (via internet banking for example) and then you are charged interest on the new balance. An offset account works slightly differently with an I/O loan too – instead of paying the same reapyment but more of it going towards your principle, you are charged less interest instead, thus lower payments . Please note that is the general situation, it may not be available with fixed loans, (and there would be no redraw either) , but on most variable loans you would have redraw . An offset a/c may be a better idea though if you have surplus funds and no non deducable debt. also, some banks/lenders may advise you you cannot to this, but it is likely to be out of ignorance or lack of product knowledge rather than you actually not being able to do so.
Hope that helps.
You can usually make extra repayments on most loans these days without penalty except the fixed ones.
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
Thank you all for your helpful replies.
To explain a bit further. Last year I converted one of my loans from variable PI to variable IO (both with offset accounts) and asked the bank just to make the new loan for the amount outstanding. This reduced my loan amount by about $70K prematurely.
I have a second loan that I want to convert to variable IO and am thinking that it may be smarter to ask for the full amount of the original loan this time even though I would put the extra straight back into the loan immediately. The reason for this is that I have savings in the offset account which I may want to use to put into super and I don't want to mix savings with redrawn funds as this would muddy up the tax detectability of the interest on this loan.
If we are likely to get to such a credit squeeze that it will be very difficult to get extra loans my thinking is that the banks will probably always let you "redraw" back to the original loan. Do you think this is right or am I over thinking this.
Cheers
Elkaring your bank and check first !
i have deposited lump sums twice to find that…. i no longer had access to the money ( first time )
which was a major hassle to undo
and more recently despite my broker saying different putting 30 grand into a loan account ( i o like yours )
did not reduce my monthly repayments ( and will not ,so why did i split my loan in the first place ? )
went to bank and it seems there are really a lot of conditions
and my dream of parking the odd lump sum until it is big enough to use as a deposit is a rare one……..
good luck !just re read that and what i am really trying to say is (in my recent experiences )
they will deduct a monthly payment that services the maximum amount of the loan
even if you have not drawn it down…..
ring first and brace yerself for the explanation…….
cheersI'm not sure why one would set up an I.O loan if you were planning on paying it back early?
From my undertanding I.O loans are best for investing , depending on individual circumstances of course.
I would avoid them for a PPOR
Warm Regards
SueMIT | Owen Real Estate
Email MeHello Sue
I've always used PI loans for IPs but now want to change over one of them to IO.
I don't really want to pay the loan out earlier.I'm just trying to figure out how much to make the new loan for given that I have nothing I want to do with any extra money at the moment. I don't want to put it into the offset account, for the reason in my post above, so I though that if I could put it back into the loan and it would later be available as a redraw that may be a good thing to do given the tightening credit situation.
I have emailed my banker and will post the reply for anyone interested.Cheers
Elka
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