Interest Only Loans versus Principle + Intterest Loans?

The tax implications would be that while you pay down a debt you reduce your ability for a tax deduction. This argument is raised often, but I can still see no reason to pay down a debt when you have the ability to use an offset account:

Reasons for i/o include:

1. Keeping the full/initial drawdown amount in tact. (A Better tax deduction is available if you make your PPOR an investment property)
2. Extra monies to invest in further acquisitions. (creating wealth is about  both cashflow and assets)
3. Increases your available equity without a refinance (you will not require car finance etc)
4. Increases your buffer if you become unemployed or like (it decreases risk).
5.Your money made in property is not from what you pay down but how the asset grows in value, the more assets you own the wealthier you will become, this is based on past performance.
 
There is no smoke and mirrors above, I have experienced this first hand. I live in a house with no mortgage yet I have never made principal payments in my life. How? Buying using the money other people are using for the principle payments and placing it into an investment property(s). My home ownership was acheived at 33 years of age.

http://www.birchcorp.com.au

OP, I'm glad you've asked this, I was going to ask the same thing as I'm confused on the benefits of a interest only loan.

Number 8, in regards to point 5 in your post you say "Your money made in property is not from what you pay down but how the asset grows in value, the more assets you own the wealthier you will become, this is based on past performance." Which makes sense to me but my train of thought is if you put just that little bit extra a week into your mortgage in a P&I loan and get the pricipal down then when/if you sell instead of having to take say $200,000 out of the sale to pay back the original principal you don't have to as you've paid it down/off?

Also, what about the fact that the property is never yours? So say at the end of the loan term you've paid off the interest, you either have to sell to pay off the original principal amount or find a spare $200,000 laying around to pay it off. Please correct me if I'm wrong with my thinking here.

I hope this makes sense? I'm fairly new to property investing and still trying to get my head around it!

The opportunity cost to paying down your debt, is the money may be used to invest in another property. When you do the math on paying down debt vs purchasing another property with the extra cash, you will see a very large difference in favour of not paying down debt.

I owned my PPOR at 33, yet have never paid an any repayments in my life (excluding i/o). This was from re-directing excess cash into other investments.

Re: Paying off a home…… This is of no concern?

e.g. I purchased a property in 1997 for $169,000, the value today is approximately $400,000. the price in twenty years will be $1,500,000 (estimate). Now, the sale price less the borrowed amount is either $1.5M or $1.331M. The difference is marginal for the opportunity cost of another property purchase.

This is one of the key concepts to wealth creation. It is a common mis-conception amongst all Australians to pay down debt. This has been a myth passed down by our parents. It encourages us to work very hard to pay a debt down in 20-30 years. Yet it may be done much quicker, and faster through innovative thinking.
 
http://www.birchcorp.com.au

And that my friend, is the difference between retiring at 33 and 63. As much as I try, I cannot help everyone.

http://www.birchcorp.com.au

I have been a big fan of IO loans for a long time but you should also consider your psychology. Some people just can't help themselves and will spend every last cent of spare cash lying around – for these sorts of people a PI loan may be better in the end.

It’s all starting to make a bit more sense now

Going with what Sandra said how you can make extra principal payments in an IO loan, if I were to do that can the extra payments be redrawn upon? So putting in extra payments when possible to reduce the interest being paid then when funds are needed redraw on the loan or would an offset account be better for this train of thought?

What I’m still iffy about is that say we’re in a perfect world and interest will ways be at 8% (for arguments sake) so with a P&I the interest being calculated will reduce as the principle reduces. With an IO loan the interest beig calculated always stay the same becAuse the principle never changes so even though you may be saving money in the short term won’t it cancel itself out in the long term because the principle isn’t being reduced and interest being calculated will always be on the original amount?

Another idea behind IO is that you use less money per money which means you can afford more investments.