Another IO vs PI question

Discussion in 'Loans & Mortgage Brokers' started by PropertyMarker, 7th Oct, 2019.

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  1. PropertyMarker

    PropertyMarker Active Member

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    Hi all,

    I'm deciding between an IO or PI loan for my PPOR (apartment) as a first home buyer. The apartment will likely not gain equity but has a high yield rental market (in Canberra).

    Reading the forums; everyone says to figure out your medium/long term goals. For me I want to invest in property in 2-3 years time.

    I figure I can take one of two options:
    1) In 1-3 years time I'll keep the apartment as my PPOR and invest in new property. New property could be a bigger house?
    2) Move out of the apartment, rent it out to become my IO and find a new PPOR.

    The loan amount is small; 325k and the difference in interest rates IO 3.29 and PPOR 3.14. I will be getting an offset account regardless.

    Over a year, I'm able to save about 30k, over 3 years which might not be enough for a 600-700k property. My IO might run out and I would have to extend before I save enough for a next deposit.

    I've calculated the following:
    Loan amount: 325k
    IO rate: 3.29
    PPOR: 3.14

    IO (5 years):
    Interest over 30 years: 531,500

    PPOR:
    Interest over 30 years: 501,835.59

    Can anyone recommend whether I should just stick to the PPOR?
     
  2. PropertyMarker

    PropertyMarker Active Member

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    Two more things:

    * In the current environment, if I rented it out; rent would cover the repayments.
    * If I put money into the offset account at the same rate as I'm saving on the P&I loan; I would not be paying interest in 8 years (ie, amount in offset is the same as loan amount).
     
  3. Morgs

    Morgs Well-Known Member Business Member

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    By stick to PPOR I am assuming you mean P&I repayments?

    I would suggest three things:
    1) Run your numbers based on what you think the new purchase will be and what level of capital you'll need, that will help define if you need to go IO instead of P&I.
    2) Validate which lenders will do IO for OO as not everyone is going to consider this, and what rates these lenders will do it at as this could influence your decision.
    3) Ensure your servicing fits with the lender with points 1 & 2 as IO loans will be assessed over the P&I term.

    The other option may be go P&I until you move out and revert to INV IO.
     
  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    are you able to get IO on the loan if it is a main residence?

    I would probably go IO based on that rate difference.
     
  5. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    Two questions...

    Who's quoting those rates for PPOR IO repayments?
    Are you sure they'll approve a PPOR IO loan?

    Very few lenders are offering interest only repayments for a principal place of residence at all. The few that do have very high rates. I know plenty of lenders that will publish IO PPOR rates, but when the application is submitted the first thing they'll say is that this is outside of their policy. They'll then tell you the only way they can approve the loan is by switching to P&I repayments.

    There also seems to be something wrong with the following statement:
    If this were true, then P&I repayments would pay off the loan in 8 years!
     
  6. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

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    It’s not easy getting IO against a ppor - which lender is this with?

    Cheers

    Jamie
     
  7. PropertyMarker

    PropertyMarker Active Member

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    Thanks for the info.

    My broker has confirmed that firstmac can provide the IO loan to the apartment even though it is "owner occupied"

    Seems to good to be true?
     
  8. PropertyMarker

    PropertyMarker Active Member

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    Wouldn't the term be the same? However, the paying the Principal will be spread over the 25 year period instead? hence the higher repayments after the 5 year mark?
     
  9. PropertyMarker

    PropertyMarker Active Member

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    * Servicing the loan shouldn't be a problem as it'll be about 33% of my current salary.
    * Currently quoted 3.29% i/o oo
    * If I aim for a 500k property, i can reach the the 20% mark by 4 years.
     
  10. PropertyMarker

    PropertyMarker Active Member

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    Damn, Just missed the 5 minute mark. Scratch that last point above.

    Further to my above post.
    * If I aim for a 500k property, I can reach the 20% mark in just 5 years. I'll have to extend the 20% the IO loan. This is based on current rates and income.

    My serviceability will go down quite a bit if I don't get another IO; savings will be harder as well and may take 2 years. I'd rather pass on the stress :)
     
  11. PropertyMarker

    PropertyMarker Active Member

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    FYI, rate matches a previous post
     
  12. euro73

    euro73 Well-Known Member Business Member

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    ?
     
  13. PropertyMarker

    PropertyMarker Active Member

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    Some people asked who the lender is. My broker's rates match a previous post.