Growing portfolio - IO or P&I?

Hi Everyone,

I'm currently in the position to purchase my third investment property in the coming months. I currently have my first Two property's with P&I loans as this was advised at the time from my broker with the current lending situation and the reduction of IO loans to investors (my understanding anyway).

I cant afford to have my Third property as P&I for cash flow reasons so I'm going with IO, but for someone that's trying to grow their portfolio in the early stages to manage cash flow etc, is it best to keep all loans as IO?

My long term goal is to own 5mil in residential property over the next 10 years, approx 7 property's.

Any advice is welcome, thanks in advance. (go easy) haha

 

IO will keep repayments down and assist cashflow. But it doesnt build equity.

Under present lending rules you will struggle to get 7 properties esp with IO. You may hit a lending servicing ceiling well before that point. Lenders recognise that if you need IO for cashflow you probably cant afford to take on more debt. Thats where a great broker can give advice.

I recently had a client knocked back on a application because of a PAYG withholding variation. The lender argued that servicing was only supported due to the PAYG variation and that was too close and declined to increase lending. It was first time I hear sertvicing blamed on this. Sort like the issues with afterpay / zip pay. Lenders can hold more against you now than in the past ...Many older posts on PC refer to strategies that are now really hard to achieve that used to be a given.

 

I am a big fan of IO for property investment.

For cashflow, I am a big fan of having you own (successful) business.

Having said that, our debt now in retirement is a lot more than when I was working .

Shows you the power of having good assets (security) and good cashflow .

 

Cashflow can sustain most problems. Those without quality cashflow may be forced to sell.

As someone who sees CGT tax events, in most instances present or expected cashflow is why they sell.

 

Will require more creative ways to build unless income/cashflow is super strong ...

Best to sit down with investment savvy broker/accountant who have been through this journey!. But lending in general is tight...

Cheers,

 

Mark, welcome and good on you for the journey you've come to thus far!
As a former broker, left ~3 months ago, having the purchase or switching to IO won't help your borrowing capacity..

Say for example you had a 30 year loan term and 5 year IO period, the lender would then calculate the repayments based off 25 years P&I, rather than 30 years therefore IO while in practice improves cashflow, the lender assumes that you'll eventually need to start paying down the debt and thus IO loans actually reduce borrowing capacity from a banks perspective..

Have you or your broker considered 2nd tier lenders i.e. FirstMac, Bluestone etc?

Alternatively as @jazzsidana has said you'll need to get creative with the way you build your wealth i.e. joint ventures, vendor finance etc.. or alternatively increase income is another way of doing it..

All the best with it..

To answer your original question though speak with your broker, accountant and take a look at your own cash-flow once the IO term finishes in case you can't extend the IO term.. It also comes down to what will come up in the next 5 years i.e. will there be kids, new cars etc

It's a much broader question than simply looking at P&I or IO .

 

In general, when talking solely about access to greater funding (borrowing power):

- A P&I portfolio will assist if you operate within 'safe' leverage terms. I.e. you don't go outside the bounds of mainstream lender serviceability. It will expand your 'green' lending, albeit marginally. It makes sense to stick to this for the vast majority of borrowers in Australia. Think of it as the 'banks guideline' to what you can reasonably afford. If you are an advanced investor, have good risk management principles & have experience making good decisions, it could be worth straying outside & accessing more funding.

- An IO portfolio will assist if you are seeking to maximise portfolio size & leverage as the primary goal. Utilising the 'yellow' & 'red' lenders below requires your initial loans to be set at IO to maximise leverage. Note, that you will need to plan for P&I cashflow in these circumstances across your portfolio, but may need IO initially to build it.