Join Australia's most dynamic and respected property investment community

Changing from IO to P&I on investment loan

Discussion in 'Property Finance' started by Angel, 4th Sep, 2015.

  1. Angel

    Angel Well-Known Member

    Joined:
    19th Jun, 2015
    Posts:
    1,294
    Location:
    Paradise, Brisbane
    Hi
    I was doing a calculation and if I change the smallest of our investment loans to principal and interest, the repayment will only be about $300 a month more than it is currently, but it will be on a lower rate. Do you think it is worth changing it over or just leave it until we refinance the lot once Gladstone is sold later in the year.
     
  2. Ace in the Hole

    Ace in the Hole Well-Known Member Premium Member

    Joined:
    18th Jun, 2015
    Posts:
    1,521
    Location:
    Sydney
    How much is the loan and how much less is the proposed rate?
    Seems like a bad cash flow loss if you go P&I.

    Just a guess, a small loan of 300k at a 0.27% higher interest rate will only be $67/month I/O.
    This is negligable compared to the $300/month you would pay if going P&I.

    I'm planning on switching my PPOR loan to P&I for the reduced rate because I don't mind paying down non-deductible debt and can handle the cash flow.
     
    Last edited: 4th Sep, 2015
  3. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,107
    Location:
    Melbourne, Nationwide
    If you have non deductible debt (such as a mortgage on your own home), for the time being it's probably better to put that $300 towards getting rid of that debt.

    If all your debt is tax deductible - Well Done! Paying P&I on an investment loan isn't unreasonable at this point.
     
    pippen and WattleIdo like this.
  4. Angel

    Angel Well-Known Member

    Joined:
    19th Jun, 2015
    Posts:
    1,294
    Location:
    Paradise, Brisbane
    The loan is $256K NAB package. It's 0.31% difference in IR after I phoned them today and another 0.06% given their recent correspondence which I will be able to get changed. Who pays 4.92% these days? $1065 a month compared to $1480 a month P and I. I thought it was only about $300 difference from the online calculator. We have Nil non-deductible debt.
     
  5. D.T.

    D.T. Adelaide Property Manager Business Member

    Joined:
    13th Jun, 2015
    Posts:
    5,596
    Location:
    Adelaide, SA
    If you have no non-deductible debt, go for it I say
     
  6. WattleIdo

    WattleIdo renovating Premium Member

    Joined:
    18th Jun, 2015
    Posts:
    1,822
    Location:
    Central West NSW
    If you won't miss that $70-80 a week and can make adjustments easily, I say go for it too. Less debt is always better, especially if not on high income.
     
  7. blackenator

    blackenator Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    96
    Location:
    sydney
    Hi Peter , If p&i is paid on investment loans are these payments tax deductible? or is only the interests portion tax deductible? I currently don't have ppor so this option does appeal to me a bit
     
  8. D.T.

    D.T. Adelaide Property Manager Business Member

    Joined:
    13th Jun, 2015
    Posts:
    5,596
    Location:
    Adelaide, SA
    Only the interest portion of the repayment is deductible.

    If you find a mortgage spreadsheet online, you'll generally find that in the first few years the repayment is mostly interest and not much principle and then as the years go on it swings the other way.

    Generally at the end of the financial year, your bank will provide a statement of how much interest has been paid (or some show it in online banking).

    If you have no non deductible debt, it can be a good idea to start going P&I on deductible debt. However, consider whether you might need the cash again in the future - in which case filling up one (or more) of the offset accounts might work out better.
     
    blackenator likes this.
  9. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,159
    Location:
    Canberra and Sydney
    I'd change to P&I since you have no non deductible debt.

    Cheers

    Jamie
     
  10. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,781
    Location:
    Perth WA
    It depends why you have no non- deductible debt. If it's because you rent at the moment but will buy a ppor in the future, much better to stay IO and save your cash.
     
    Terry_w likes this.
  11. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,107
    Location:
    Melbourne, Nationwide
    Jess makes a good point. My previous statement was on the assumption that you already own your own home. If you do intend to buy your own home in the future, then perhaps it's worth staying with I/O payments and saving money towards buying that home.

    There's very good arguments for buying your own home sooner rather than later. Certainly an IP is more affordable in many cases, but buying your own home locks in the non deductible debt at today's prices (rather than having more non deductible debt in the future).

    A good compromise might be to purchase a property which will eventually become your home, but put a tenant in it in the immediate term. It would be perfectly reasonable to make P&I repayments on this loan in the meantime.
     
    Jess Peletier likes this.