Hi all..
I keep hearing all this talk about setting up interest only loans for investment properties being the only way to go. I am not sure about the theory behind this? I realise for positive cashflow properties this is fine, as the interest is fully tax deductible, and the investment strategy is purely for cashflow purposes.
However i have a buy and hold strategy and negatively gear my IP. My IP is worth about $300k, loan is at $230k, and while my rental income is slightly under the weekly loan repayments (note the loan is principle and interest), i am only about $30 out of pocket each week.
My current situation sees me living with my parents as i am still young, and have basically ZERO living expenses, so i am putting a lot of spare cash onto the loan on a weekly basis. I see this as a sound strategy as i am reducing the value of the loan much quicker (building more equity) so that i can use this equity to purchase another IP.
I am concerned that i should be using an Interest Only loan (only going on what most people suggest) for my next IP..Please help?????? Any feedback greatly appreciated
Yep, sounds like a good strategy, but…
The only potential problem is you are paying down tax deductible debt. Say you put an extra $100,000 into the loans and then later decided you wanted to buy a place to live in. That would mean you would have all your money tied up in the investments and you would have to borrow another $100,000. that is another $6,000 pa in interest which you could not deduct.
On the other hand say you put an extra $100,000 into a 100% offset account. You would be saving the same interest as the first method without paying the loans down. You then go an buy your home, you have $100,000 deposit, which is taken from the offset. You are now saving $6000 in interest off the home loan, but increasing the investment loan interest by $6,000 (as the offset is no longer there).
If you were on the top rate that is approx $2,600 in tax saved. Without any effort. Imagine if the figure in the offset was higher.
The only time i would not recomend this is if you will be tempted to spend the money in the offset – some people need to spend every cent they can get their hands on and a PI loan is a way of forced savings.
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
Thanks Terry,
So you generally have Interest Only loans for a term of say 5 years.. What happens at this point when the Loan returns to Principle and Interest? With the Interst Only Loan do i end up paying more over the duration of the loan/does the total loan duration take any longer etc?
It seems as though there is no real case to ever have a PI loan for an investment property in my case?These days 10 year interest only is readily available. Either way, I would suggest you extend the IO period another 10 years – or the maximum. You won't pay more interest overall if you keep saving in an offset. You will if you squander the money.
I would never have a PI for a loan. even owner occupied.
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
ok.. i really appreciate the feedback.. but i am still a bit confused about a couple of things..
I understand that having money in the offset account reduces the interest payable, and can be used as a deposit for a future house, but how do i ever build equity in my investment property, especially if i have 10 year interest only periods? I am ony new to this sort of thing..
Does this mean that at the conclusion of my 10 year interest period, the mortgage payments increase (and only paying principle off), hence larger mortgage payments and no tax deductible interest? Please help, and sorry to be a pain
Normally you would wait till your have paid off the loan on your main residence and then you could start paying PI on the investment loans. But I would still suggest IO with offset is better. You will get equity by the increase in value of the property and the increase in the savings in the offset account. You can use this at any time to pay down the loan – but again I wouldn't suggest you do that. better to use the money for the next one etc.
Don't worry about paying off loans – other than your home loan. Just keep on investing and you will be better off as long as the investments are returning more than the interest.
Actually you may worry if you are the kind of person to just spend money. paying PI can be a form of forced savings.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
Thanks very much for the feedback, i am starting to get my head around it now.. Only thing i'm still not quite sure about is..
Once the 10 year interest only period finishes, all of a sudden my repayments shoot up through the roof??? With 4,5,6 properties or more, how do i service the loans?
chrisb123 wrote:Thanks very much for the feedback, i am starting to get my head around it now.. Only thing i'm still not quite sure about is..Once the 10 year interest only period finishes, all of a sudden my repayments shoot up through the roof??? With 4,5,6 properties or more, how do i service the loans?
Some options/points
– By this time rents should have gone up considerably too.
– You can also extend the IO period if you wish
– Sell 1 property and pay down debt.
– and hopefully your wage will have doubled during this period too.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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