LOC to Pay IP Interest

Hi Nathan,

The important part to note is in one of the dot points from my first post:

* $500k PPOR with $140k owing with $400per week minimum payment (we're paying considerably more currently)

So before we get this IP squared away we are already making a lot higher repayments than the minimum $400 a week.

That $400 a week is based on a loan that started at $230k principle and interest.  Regardless of how much we pay off the loan unless there is a dramatic shift in interest rates or we refinance at a lower $ amount, the repayments will still be around $400 a week.

If I capitalise the interest of the IP into the LOC (and other expenses) for the first 12 months the LOC will grow to around $45k.  By capitalising the interest I put 100% of the rent onto my PPOR mortgage  which with our extra repayments already should bring out PPOR mortgage to a payout date of this time(ish) next year) instead of late 2011 to mid 2012.

The PPOR loan is principle and interest based on $230k @ $400 a week (minimum)
The LOC is an interest only loan and at $45k will mean repayments of $50 a week

With the LOC while being 100K another important thing to remember is we only pay the interest on what the current balance of the LOC is.

To possibly pre-empt another question, how do we pay out the LOC?

We probably don't, there are a couple of strategies that could be employed but the one will most likely consider is once there is enough capital growth in the apartment we will restructure that loan to absorb the LOC. 

This current methodology is with the sole goal of paying out our PPOR in as short a time as possible.  Future IP purchases will mostly be done using a LOC to supply the deposit and expenses to allow us to finance the IP without cross collateralising.

I hope that explained it p.s. seeing the conveyancers on Wednesday with 10% deposit in hand to exchange contracts, things are really starting to move now.Glennsa

G'day Paul,

Yes, our minimum $400 a week repayment + $650 a week rent from the IP + additional payments of another $825 a week totalling $1850 a week will pay out our PPOR mortgage by the end of next year.  Ahh I just tallied it up ($96k) and see where the confusion may be stemming from, we also have a tidy sum in our savings account which is offset against mortgage which is what will also allow us to payout at the end of next year.

We are in a position of two full time incomes, no kids and no other debts or major expenses.  With some sacrifices for the next 12 months (and the knowledge of a full redraw if things go wrong) we will be able to smash the loan.

Some may say instead of slaughtering our own mortgage with that kind of extra money we could afford another four or five IPs now.  Sure, that is an option, but this is our first forray into IPs so we want to ease ourselves in, so to speak, and also with the window of paying out our own mortgage so very very close it would be nice to be "bad debt" free from that perspective.

The apartment is currently tenated at $650 a week which is the second tenant at at that amount.  There is another in the same building which is also tenated for the same – a different managing agent looks after it and I have had a long chat with them.  Does that mean we are garraunteed that sort of return, no, but the historical data is promising.  No need to be sorry, I've had lots of questions of the last months that have been freely answered.

Glennsa