Hi People,
Does anyone here know how does Interest only loan works ? When should I pay it off ?
should I wait until the property price is equal or the same value as the loan value ?my scenarios is with my home which is now has become investment property
it seems that when I combined the IO loan with Line of Credit (LOC) + Credit card, the debit interest in the IO loan keeps increasing and I’ve never seen it decreasing.my only understanding is that with the LOC is that it keeps generating interest whenever there is shortfall from its full amount and not generating interest when it is currently full / paid off.
It all depends on your overall strategy…easy for me to say but ill give you an example.
Mr and Mrs smiths strategy is to make $100,000 in capital growth…to further invest into another IP.
– 2005 buy a $400,000 property with I/O to improve cash flow so can purchase another IP sooner etc…
– Since it was done as I/O rent = so only need to fork out a bit extra each month form their own pocket.
– 5 years later they decide to sell at a gain of $530,000 — CGT paid…profit of $100,000Use $100,000 into another IP purchase…
—-
So to answ your question; when you pay it off depends what “purpose” this IP serve in your overall strategy; sometimes you will NEVER pay it off but instead sell…. but either way make sure your progressing financially and not getting into further debt and heading towards a dead-end.
Regards
Mick C | Shape Home Loans
http://www.shapehomeloans.com.au/
Email Me | Phone MeSame Banks. Better Rates. Served With a Passion.
Henry Adams wrote:1.Does anyone here know how does Interest only loan works ? When should I pay it off ? should I wait until the property price is equal or the same value as the loan value ?2. my scenarios is with my home which is now has become investment property it seems that when I combined the IO loan with Line of Credit (LOC) + Credit card, the debit interest in the IO loan keeps increasing and I've never seen it decreasing.
3.my only understanding is that with the LOC is that it keeps generating interest whenever there is shortfall from its full amount and not generating interest when it is currently full / paid off.
I/O periods are determined by your loan contract. It will stipulate the length of the loan and how much of that time is I/O. At the end of the I/O your repayments will convert to P & I unless you can renegotiate the I/O period.
1. When/if you ever pay the loan off will be determined by your strategy. Some people will do as Michael has explained. Others will attempt to pay down their loan so they own the property outright.
2. Take the cc out of the equation. In most cases the CC is used for non-deductible debt and if you are not clearing the debt on a monthly basis you will be accruing interest at 20% ish. The interest on your I/O loan shouldn't change apart from some variation because of 28/30/31 day calculations. I suspect the accumulating interest bill is due to you possibly capitalising interest in your line of credit rather than making interest payments with your own cash.
3.A LOC incurs interest just like any other loan. If you have an outstanding balance in your LOC then you will incur interest. LOCs often have this interest adding onto the LOC balance providing the limit has not been reached.
What you have to understand is that the interest on the LOC & the cc must be met by repayments otherwise you are accumulating interest on the interest & increasing your borrowings.
It is not rocket science, you keep borrowing you either pay more interest or you erode your asset base.
Shape wrote:It all depends on your overall strategy…easy for me to say but ill give you an example.Mr and Mrs smiths strategy is to make $100,000 in capital growth…to further invest into another IP.
– 2005 buy a $400,000 property with I/O to improve cash flow so can purchase another IP sooner etc…
– Since it was done as I/O rent = so only need to fork out a bit extra each month form their own pocket.
– 5 years later they decide to sell at a gain of $530,000 — CGT paid…profit of $100,000Use $100,000 into another IP purchase…
—-
So to answ your question; when you pay it off depends what “purpose” this IP serve in your overall strategy; sometimes you will NEVER pay it off but instead sell…. but either way make sure your progressing financially and not getting into further debt and heading towards a dead-end.
Regards
Thanks Michael thanks for the reply however by first looking into the interest only calculator (Online) and from my statistic findings of rental property in the location that I want
monthly repayment http://www.comparehomeloans.c?om.au/interest-only-loan-calculator/
Borrowing $450k, interest 8% (pessimistic), 30 yrs loan
Interest only cost me about $3000 per monthwhich means if the rental property get rent for $500 p.w x 4 = $2000
then I’ll be “bleeding” out $1000 for the shortfall as the negative gear components, so does this means the only way to pay it off is to make sure that the IP is always double in value every 10 years ?
Henry Adams wrote:, so does this means the only way to pay it off is to make sure that the IP is always double in value every 10 years ?Imagine you had purchased a house in Sydney 30 years ago for about $30,000 and you had only ever used an IO loan. You would still owe $30,000 today.
Now what would you expect to pay in rent for a Sydney property? Maybe something like $30,000 pa today.
So you could pay off the loan in full in one year (almost) by the rent alone.
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
Terryw wrote:Henry Adams wrote:, so does this means the only way to pay it off is to make sure that the IP is always double in value every 10 years ?Imagine you had purchased a house in Sydney 30 years ago for about $30,000 and you had only ever used an IO loan. You would still owe $30,000 today.
Now what would you expect to pay in rent for a Sydney property? Maybe something like $30,000 pa today.
So you could pay off the loan in full in one year (almost) by the rent alone.
ok, now I got it so the IO loan will be paid off by taking the assumption of increasing rent rate per annum, assuming I can still be granted the terms of interest only with the bank.
Also, you should be taking IO so that you could be paying off your PPOR faster. Or if you don't have one so that you can save up for one faster.
Once you have paid off your PPOR you can then start paying down debt on the investment properties as well. (or save into an offset and then have the choice of buying more or paying off 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
Terryw wrote:Also, you should be taking IO so that you could be paying off your PPOR faster. Or if you don't have one so that you can save up for one faster.Once you have paid off your PPOR you can then start paying down debt on the investment properties as well. (or save into an offset and then have the choice of buying more or paying off loans)
ok, cmiiw so in this case when using IO loan, we paid off the interest component only (the largest part of the loan), while the principal can be paid off somewhere after the loan become CF Neutral or CF+ ?
The loan gets paid off because:
1. Rent increase by inflation atleast while your loan term is remains the same — a $300,000 loan 10 years ago is not the same as having a $300,000 loan in today’s money ( inflation and price of $$)
Cost of money
Rent= increase
Mortgage= remains the same ( I/O)2. Now for the rent to = mortgage repayment will take some time…this is where capital gain kicks in, if your property goes up by 3-5% each year ( very conservative already). 5% of $300,000 = $15,000 a year in unrealized profit….of coures there be a point where there be negative growth but if you buy right in the right location it should generally go up on a 10 years timeframe
Regards
MichaelMick C | Shape Home Loans
http://www.shapehomeloans.com.au/
Email Me | Phone MeSame Banks. Better Rates. Served With a Passion.
Cool,
thanks Michael for the explanation, I appreciate it.
Cheers,
Henry
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