Hey everyone,
I have just signed a pre work contract and put down a small deposit on a house and land package which i intend on using as an investment property. All up, the property is going to set me back around $320,000, and i have around $150,000 of my own funds. It is my first property purchase, but I'm forfeiting the FHOG in favor of being able to rent the place out straight away, and not have to live in it for 12 months.
I spoke to a mortgage broker, and his recommendation was a 2 year fixed rate, where id be putting any money i earned, aswell as rental income into an offset account. He also suggested interest only rather than principal and interest.
Realistically, my hope is to have this payed off within 3-4 years (or at least have the balance of my mortgage in my offset), at which point i would purchase another property. However, the whole interest only suggestion is confusing to me to say the least. I didn't quite see how interest only would benefit me in my situation. if anyone could shed some light on it, or give me their suggestions, it would be greatly appreciated.
Thanks!
Hiya and welcome aboard.
Which lender is this with? There aren't many lenders that will link up an offset account against a fixed loan. You can get around that by keeping a portion of the loan variable and linking an offset up to the variable loan.
Are you planning on purchasing an owner occupied property at some point in the future? If so, I wouldn't be putting $150k into your investment property and I definately wouldn't be aiming to pay off the principle as quickly as possible.
Interest only with an offset works really well. Instead of paying down the principle – you place your spare cash/savings into the offset instead which essentially provides the same outcome albeit without paying down a chunk of tax dedutible debt.
Here's an article I wrote for Australian Property Investor magazing on the topic – hopefully it helps. if not – ask more questions
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]
Thanks for the reply.
Its with Bendigo bank, and yes, at some point in the future i would be purchasing an owner occupied property. Whether its the next one, or the one after, i haven't decided yet.
So effectively what you're suggesting is that i pay interest only, and just put all my cash into the offset, while paying off none of the principal? Is that correct?
In terms of what amount to put down as a deposit, i was thinking 100-120k, and the rest straight into the offset.
Thanks
Hi Guys ,
its not a good idea to pay off your investment loan just use the equity and keep multiplying untill you get to a point where you see properties paying itself off .Property investing is like a business ,if you need more info i can give you my Mentors contact .i have learnt a lot from him and i am happy to give some back to public.
hey anc111.
The replies you are getting are generally spot on.
But just to address your statement "However, the whole interest only suggestion is confusing to me to say the least"
It took me a while to get my head around the Interest Only concept to begin with also.
I kept thinking… 'But, i WANT to pay the loan off eventually!! "
Interest Only options are great if you are looking to BUILD UP a portfolio, and will be needing money for another purchase.
The benefits to Interest Only are based around these concepts:
1. Lets say the difference in repayments between Principal & Interest, and Interest Only is $500 a month…
All that money you are paying onto the Loan is saving you interest sure.. but when you want to borrow for your PPOR, and you borrow against that equity you have paid off, that new balance will not be tax deductible. If you had selected an Interest Only loan and paid that extra $500 a month into the offset account, you can just take it out whenever you want…. and that balance is still tax deductible.
2. Second concept is, it free's up cash flow, which allows you to invest the cash somewhere else (ie another property)… when interest rates are low as they are currently, interest only is fantastic because you can probably get a better return sticking your cash somewhere else
I am not qualified to give financial advice, this is just my response to your topic through my property investment experiences.
Hope that helps!
Hi anc,
Quote:In terms of what amount to put down as a deposit, i was thinking 100-120k, and the rest straight into the offset.Pay the minimum Deposit you can – you may wish to avoid LMI, in which case it would be 20% (or $64k) but do consider whether it might be better to pay LMI (in the early 80's it is not very expensive) to retain control of the maximum amount of your money. THEN stick what's remaining in your Offset.
By the way, here's a look at one of my posts that attempts to explain the Offset Account and what it does :-
https://www.propertyinvesting.com/forums/help-needed/4349510#comment-296699
Maybe that helps some? It is worth spending some time getting familiar with the options available to you, and the two main ones are like chalk and cheese (the Offset is the cheese, IMHO
).I would advise that you contact a good Mortgage Broker – there are several on here and their sigs identify them. A good one will take you through your situation now, AND be mindful of "Where you want to be" in the future, and will advise how best to get there.
As you are finding, this whole finance area is quite complex – but, get it right, and your path will be so much easier down the track.
Benny
I agree with Benny in regards to the minimum deposit – especially for an IP.
I could write a long winded response as to why – but fortunately I wrote an article a couple of years back that explains it. It's available here.
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]
Thanks for your help everyone, its greatly appreciated!
Hi Anc111…
This is a calculator that i came across in another forum and i think you will find it very useful
It will let you add your purchase price, deposit and calculate your stamp duty, lmi, grants etc. then will work out how much your loan amount will be and use that figure for calculations.
you also enter your purchase suburb and will use capital growth data to help you calculate equity, and in your case a fixed/interest only period and how much money you will save into your offset account.
once youve added everything it will give you heaps of calculation results and you can find out when you are likely to have enough equity to fund your next purchase.
takes a good 10 mins to get your head around it, but i found it very helpful and listening to your situation i think you will also.
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