My husband and I are keen to acquire property assets but also have a high priority to have one of us stay at home with our young gals. We will be doing this for the next 3 years until they are both at school. i have been at work for the past year and will be working again this year, I am planning to be off in 2012. I earn approx 95000, my husband earns 83000. I am very good at keeping a budget and not spending too much but we need to maintain a good quality of life with our gals (not acquiring 'things' but camping and activities)
We only owe 40k on our property worth about 200k. We have been crunching the numbers after much research into positive cash flow property and are coming to the realisation that we will realistically need to carry part of the cost to get into assets building…..we need to think about how long we will be doing this until the property starts looking after itself if we choose the principal and interest loan….if it ever does.
We have been given advice that it is better to have interest only loan for growth and buying more property….but only being on one income concerns me because if there is no growth we will be in the same place year after year, and when my husband goes back to work we will have less income to work with. The same adviser said that I should considder not having a year off with my gals and I find that very depressing because I will not have the chance to do this again.
Has anyone any advice, has anyone been in this situation, does it all look better after tax????
Hi Wallalong
Interest only loans do allow for greater cashflow. You may be able to mitigate the risk of no growth by carrying out due diligence on the areas you're looking to invest.
If you're concerned about not paying off the loan, you can always set-up an offset account against the loan. You could make regular repayments into it – which has the same effect as paying down the principle. This interest only with offset option gives you greater flexibility and improved cashflow.
The new NCCP legislation requires borrowers to disclose any future events that may affect their ability to service a loan. This is something you'll need to consider if you're planning on taking time off next year (and are foregoing an income).Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
Hi wallalong
As Jamie has mentioned an interest only loan certainly will give you flexibility when it comes to repayments.
I would however certainly suggest you look at what structure / entity you might buy any potential invesment property in especially as one of you is likely to be off work for the coming 3 years. Maximising your deductions both cash and non cash is imperative given the reduction in cash flow.
A second opinion from an adviser who specialising in assisting investors wuld be well worth it.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Wow!!! You only owe $40k on your $200k property! Well done. You have been very diligent and payed that down and that puts you in a great position.
You have already received some great advice from the people above.
Interest only can be a great idea as your repayments are less and it frees up cash flow. However, if you prefer to pay down the principle then that isn't a bad thing. It just means it will be a little bit longer before the property becomes positively cash flowed.
You have put yourself and your family in a great position, almost owning your home outright and looking to invest. Keep looking into it. Even with only one income, it is likely that the banks will still lend to you if your finances are as good as you say they are. The might just lend you less than what you could currently get with two incomes.
What price range are you looking for your next investment property?
Ryan McLean | On Property
http://onproperty.com.au
Email MeIf you have an interest only loan and it requires you to repay $1000 a month in interest but you have capacity to pay $1400 a month, if you have a variable loan what is stopping you from going interest only and still repaying $1400 a month?
That is pay $1000 interest and $400 principle pay down?
Why would you go into a interest and principle where you are required to pay down $1400 every month. Atleast with interest only you get an option.
Am I missing a point here guys?If you go intersest and principle do you get a better interest rate or does it mean if you are paying 1400 a month effectively you are paying down more principle?
If not, why would anyone go for a principle and interest when they coulod go interest only and just make the repayments when they want?
This has confused me at times.
The interest rate would be the same on an IO or a P&I loan. So in essence, if a P&I loan required you to pay $1400 a month, but an IO loan required you to pay only $1000 a month, then if you chose to get an IO loan, you could pay $1000 month to that to cover the interest, and deposit $400 a month into the offset account, and you'd achieve the same result. Of course, due to the increasing balance in the offset account, the "interest only due amount" would decrease with time. So let's pretend that in month 2, the interest due was only $995. Then instead of putting $400 into the offset, you'd put $405. Such that you are in essence paying at the same pace as the P&I loan.
Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
JacM wrote:The interest rate would be the same on an IO or a P&I loan. So in essence, if a P&I loan required you to pay $1400 a month, but an IO loan required you to pay only $1000 a month, then if you chose to get an IO loan, you could pay $1000 month to that to cover the interest, and deposit $400 a month into the offset account, and you'd achieve the same result. Of course, due to the increasing balance in the offset account, the "interest only due amount" would decrease with time. So let's pretend that in month 2, the interest due was only $995. Then instead of putting $400 into the offset, you'd put $405. Such that you are in essence paying at the same pace as the P&I loan.Great explanation! I learn a lot from this post. Thanks!
Pleasure!
Many investors prefer IO loan with offset account, because they can withdraw the money from the offset account whenever they want, and do not have to pay a fee or make an application to do so. So you could put all your spare cash in the offset to save on interest on this property, and then when you have a lot of money in there, you could withdraw it and use it as a deposit on another property purchase!
Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
So that is where I get confused. Why would anyone want an P&I loan when they can simply go for a Interest only.
Say overall you still repay $1400 a month does the P&I principle get repaid down faster because of the way the interest is calculated?
Interest only Loan interest is calculated like this (for a year) – Interest (say 7%) x Principle outstanding So, essentially as you pay down the $400 principle a month your interest would decrease each year as it is calculating 7% pa on a principle amount less $400 each month.
However, for P&I they base it on the compound time value of money formula Principle owing = repayment/interest[(interest – 1(/1+interest)^number of years)]
So for the P&I loan over the time of the loan the principle proportion of the $1400 increases and the interest proportion decreases.Say over the 25 year frame if you paid down $1400 on each loan a month would you pay less interest on the Principle and Interest loan? Or would the interest amount as a proportion of total amount paid be the same for both Interst and P&I?
If it is the same why would anyone go for a P&I loan?Ok just ran the figures through a loan amortisation schedule and also did the calculation for interest only and the overall interest paid and loan balance outstanding at the start and end of each month remain the same, ASSUMING the principle component of the interest only decreases by the amount of the extra payment over the interest only. For a variable loan, does the interest only loans principle decrease by the amount you pay over the interest amount? You guys were saying it doesn’t but it effectively is via the offset account? So the principle component stays at the original balance but you get interest from the offset account?
You do not earn interest on monies in an offset account. However the amount in the offset account reduces the "principal amount that is charged interest".
Using this strategy, you don't pay off the principal. You simply aim to have your ofset account balance equal to the principal amount…. at which point the interest payable would be $0.
Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
Ok so essentially the offset account acts as a reduction to the principle amount. So in effect if that happens there is no difference between a P&I and I loan should you do same monthly principle reductions every month.
I don’t get the purpose of the offset account then. Why can’t they just reduce the principle loan amount?
Does the amount the offset account reduces from the principle charge a different interest rate? If not, why do they even need an offset account, why can’t the bank just reduce the principle balance of the loan?This states otherwise
http://www.echoice.com.au/mortgage/home_loans?pn=/info/home_loan_types/offset_account.htmlInterest you make offset by interest you pay
Therefore, bank could essentialy make a "margin"
propertyboy wrote:This states otherwise
http://www.echoice.com.au/mortgage/home_loans?pn=/info/home_loan_types/offset_account.htmlInterest you make offset by interest you pay
Therefore, bank could essentialy make a "margin"
What in the article has brought you to that conclusion? I don't see it
This article seems to be about a P&I with full offset, rather than an IO with full offset.Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
propertyboy wrote:Ok so essentially the offset account acts as a reduction to the principle amount. So in effect if that happens there is no difference between a P&I and I loan should you do same monthly principle reductions every month.
I don’t get the purpose of the offset account then. Why can’t they just reduce the principle loan amount?
Does the amount the offset account reduces from the principle charge a different interest rate? If not, why do they even need an offset account, why can’t the bank just reduce the principle balance of the loan?The offset account absolutlely does not reduce the principle amount, if it did there would be no difference between in and redraw. It just reduces your interest expense. The greatest benefit is that it doesn't reduce the principle amount, which means that money drawn from the ofset account is not considered new borrowings, which redrawn money is. This means you are free to use money in an offset account for anything you wish without affecting the tax treatment of the debt it is offsetting.
Interesting reading here, thanks everyone for their posts. I have an example here where I think it shows the advantage of an offset account:
Me: 100 000 cash, no properties owned
Buy first house as holiday house (say 200,000 to buy), put 20,000 deposit, 80,000 in interest only offset account– – -2 years later- – –
Buy second house as residence, move 80,000 to my new mortgage (PPOR), and rent out holiday house as a full time rental (20,000 left on investment property).
In this example is an offset account with interest only the way to go? Assuming I will buy an investment first and PPOR second, it seems this my best option. Happy to hear some comments though.
Are there any drawbacks for this method? Can the holiday house still purchased outright the same way or are there catches with the IO offset account?
Also, can the offset account be used to 'tune' the repayments to match rental income?
ie – holiday house mode: low rental income/high deposit/low repayments
– full time rental mode: high rental income/low deposit/high repaymentsI assume that i could change from holiday mode to full time rental (or vice versa) at any time? Would this be possible?
Any advice would be greatly welcomed
propertyinfo wrote:Interesting reading here, thanks everyone for their posts. I have an example here where I think it shows the advantage of an offset account:Me: 100 000 cash, no properties owned
Buy first house as holiday house (say 200,000 to buy), put 20,000 deposit, 80,000 in interest only offset account– – -2 years later- – –
Buy second house as residence, move 80,000 to my new mortgage (PPOR), and rent out holiday house as a full time rental (20,000 left on investment property).
In this example is an offset account with interest only the way to go? Assuming I will buy an investment first and PPOR second, it seems this my best option. Happy to hear some comments though.
Are there any drawbacks for this method? Can the holiday house still purchased outright the same way or are there catches with the IO offset account?
Also, can the offset account be used to 'tune' the repayments to match rental income?
ie – holiday house mode: low rental income/high deposit/low repayments
– full time rental mode: high rental income/low deposit/high repaymentsI assume that i could change from holiday mode to full time rental (or vice versa) at any time? Would this be possible?
Any advice would be greatly welcomed
Offset account and IO would be the way to go. As you say when you buy a new house you just take the money in your offset account with you to the new one.
The only time I wouldn't recommend this set up is if you are temped to spend money lying around in your account. But even then you should not have PI on an investment if you still have personal debt.
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
Interest Only can be fixed or at a variable rate. Can you get an Interest Offset account with a fixed interest loan In Australia?
Usually fixed loans don't have offsets available, although some banks offer them on 1 year fixed loans.
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
Blank Frank wrote:Interest Only can be fixed or at a variable rate. Can you get an Interest Offset account with a fixed interest loan In Australia?Yep, sure can.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
This article seems to be about a P&I with full offset, rather than an IO with full offset.
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