Going interest only for the next 3-5 years

Hi all just after some advice in regards to interest only mortgages.

currently have a dual key i built and rented out in qld making great cashflow, im looking at going IO for the next few years to get some higher cashflow to try and purchase some more property's im looking to build a duplex or a 4 bedroom house in qld for my next one.

my question is will going IO along with my wage (90-120k a year tiling) help with lending and with the current market and everything thats going on in the world will the next 3-5 years be a good time to go IO to purchase more property? I currently have around 2-300k in equity but the banks are valuing lower than over valuation’s at the moment. (Bank valuations are 650-700k and real estates are valuing at 900+ I think because banks seem to under value dual keys- lesson learnt)

I will save most the income i will recieve from the IO period (put in a offset account) but mainly the extra 30k i will get ontop of my wage will help with lending so i have heard.

i will stay IO for my next mortgage too so will basically maximise my IO periods for any mortgages i can get for the next 5 years and save the cashflow into my offset accounts.

im quite certain im going to do this but any advice would be great!

thanks all!

 

For most lenders, going interest only will reduce your future borrowing capacity.

Reason being, is instead of needing to show ability to repay the loan over 30 years then you need to show ability to repay the loan over a compressed period. If you go 5 year interest only then it'll be 25 years.

As to if it would be a good idea I would suggest mapping out the borrowing capacity you need for the next one with the current debt as P&I and as IO to make sure it works.

 

Right i see so going IO can make it harder ok, maybe best too leave it as PI then, im already making 1400$ a month passive income so its got good cashflow already, il look at staying PI then

 

Il ask my broker first if going IO would be do able too even for a year or so

 

I am not a fan of P&I at all.

If need be, mimic a P&I loan by having a IO loan with an offset. Pay the interest on the IO loan as per normal but deposit the principal component into the offset.

I don’t understand why one would give the bank a dollar today in principal if one can pay the dollar in say 30 years time when its worth is a lot less.

As an example, I bought my first IP for $125,000 in 1992 with a loan of $125,000. That is the loan is 100% of the property value.

Today, 30 years later, the property is worth $900,000. That same $125,000 loan is now less than 14% of the property value.

This shows the depreciation in value of money over time. Hence, I am a big believer in keeping money I owe in my pocket and delay paying it back for as long as possible.

The other benefit is the principal component in the offset is a cash reserve for risk management and can be utilised at any time for whatever without having to seek anyone approval.

Just wanting to provide a different perspective.

 

Ok great advice there mate this is what i have been hearing a lot from investors, staying IO for as long as possible and using the extra cashflow, il ask my broker this and look at going IO for a while

 

We started to pay P&I in last few years because fixed interest rates were very attractive and paying the same with IO. But- now the problem is these fixed P&I are finishing and bank won’t let us go back on IO without full assessment- which is pain in the neck. In a long run, keeping IO as long as possible would be a better option especially you are accumulating.

 

Yeah i have heard its best for accumulating, im going to go for it and do duplex builds & get maximum cashflow during the IO period. Cheers for the advice

 

Going IO can you fix the rate still and be able to get more mortgages?

 

The facility I have you can maintain a "reserve" at a cost of 0.7% pa un-utilised fee. There is no offset or you can reduce the principal and reapply when funds are required to reduce cost (but no reserve).

 

… and great in retirement.

All of our loans are IO with offsets. We recently bought a new car - took the money out of one of our offsets and getting a tax deduction for the interest being charged.

Try and do that with a P&I loan

 

Awesome mate

 

This is not always the case it depends on regulations and bank policy at the time. The last loan I got the bank gave me 50% loan more on a P&I loan than an IO loan(150% of new property). The P&I payments were the same as IO payments, meaning instead of payments covering interest and being dead money, half of it is reducing the principal , thats why you can borrow more. With my loan the extra borrowing amounts to 10 years loan repayments. Free money to repay loan. Now if I invest the extra funds may be 20 years, or all of repayments are free, plus I have income from the 2 properties used security as well , half of it new income. The properties have had 10% CG since I got the loan 6 months ago along with loan reduction means lower LVR and so increased borrowing capacity. You cant compare 1996 with now, all you needed do than was take out an LOC and ring up you bank manager if you wanted to extend it.

 

Yeah i see im going to run it by my broker and see what can be done with my current situation,
Im aiming for hugh cashflow propertys built new (dual keys and duplexes) so im going to see some good cashflow from them im already getting 950$ a week rent from my first dual key!

So is it best to use the income and put it into the offset account when going IO?
I was planning on travelling for 6 months on it too haha but will see when the time comes

 

Sorry what does LOC mean?

 

Line of Credit

 

Would have thought that doing that with interest only would have the exact same result.

 

Not if you do a redraw on the P&I loan

 

Correct me if i'm wrong, i think It does but on a lot less money because on PI you have already been paying the loan down. So you will have less deductions on PI vs IO