Help! IO & P&I loan - rates increasing

Hi,

I have 2 investment properties (with no PPOR) and have an IO loan with a 100% offset account. I have had 1 place for 5 years and the other for 2 years.

The bank recently sent me a letter to say they would be putting up my rate by 0.40% on the IO loan but if I moved to P&I, they would keep me on the same rate I am currently on.

I have spoken to my broker and he said if I stayed on the same rate for an investment loan for P&I, it is very competitive, but I would just like to get your opinions/advice. I should note that I can afford paying P&I as I have made sure I have been leaving this amount in my offset (and even more) to ensure I am paying it off quicker.

I understand that it is a tax benefit to keep it IO so if I ever need the money, I wouldn't have paid down any of my principal, but I don't see myself in the next 5-10 years buying another property as I am sole income earner and happy with my situation as it stands.

Thanks in advance.

Debbie.

 

Hi Debbie,

A happy medium might be to refinance them (particularly the 5 year old one) back out to 30 years and make it/them P&I - that way you get the benefit of the lower rate, but also lower the payment by extending the term back out to 30 years. That way you can still maximise your cash savings as it's a good idea to have cash to put toward a PPOR if that may be required in the future.

If the odds are high that no further properties are on the horizon, paying P&I can be a good option.

 

Have you looked at the P&I repayments over the 25 year term (provided the 5 years IO are over)? The repayments would be much higher than you would on a 30 year P&I term.

As Jess recommended, I would look at the potential to either refinance to a new lender or do an internal refinance to extend the term back to 30 years P&I AND get better pricing.

 

Without a PPOR you might as well be saving money by going PI, but as Jess says look at refinancing to a lower rate still.

 

There are some really good 2 & 3 year fixed rates for IPs circa 3.88% that may be worth considering.

Works out to not be a lot more than IO at an inflated rate and you are reducing the principal and creating "equity" as a result.

 

Thanks everyone for your advice.

I knew there was more information that I needed to provide, but wasn't sure until you started responding...

I did refinance about 1 year ago and I only have 1 loan for the 2 properties. So I am not sure if refinancing again, just to make up 1 year would be beneficial. My broker did say that if I was going to refinance for an Investment P&I loan, my rate is the 2nd best he sourced, with the best being 0.04% better.

I was in a fixed rate previously and keen not to go down that route again.

I should also say that I am nearing of being positively geared so I am not sure if that makes a difference. I also have 1/3 of the loan paid off but sitting in my offset.

I have thought of buying another property but with a single income, I think I am done for a while.

I don't think I will be buying a PPOR anytime in the future as I live near Sydney CBD and could never afford to live here and don't want to move out of the city.

Thanks again for your advice.

 

Why!!!!!!

 

You ask why? Why did I put them into 1 loan?

I was on 2 different loans with the same bank and was getting charged a package for each loan.

When I refinanced, I thought it made sense to combine instead of having 2 loans.

I paid 20% deposit for my 2nd investment property and used the equity in my first property to buy my 2nd.

 

Yes, that is correct.

 

Generally packages do not limit the number of properties or loans

 

Hello Debbie, I believe that your decision should be dependent on your future plans. If you wish to add to your portfolio, cash outflow should be minimum ( IO) but if no future plans for expansion of portfolio, then PI is good idea especially at present rates. Of course even with PI, you can go for expansion but down payment money may involve revaluations etc and time can be a factor. Statistically, banks do not favour you in any product. The discounted rate in PI is just the benefit passed on to you for payments made against principle.

 

Which bank? Plenty of banks (most) charge the one package fee for all home loans held with them.

 

No, but since I had so much equity in my first place and both places combined are worth double of what my loan is at the moment, I didn't have an issue with security of them being tied together and I didn't think there was any point in paying 2 package fees for 2 loans.

Does that make sense?

 

I am with Suncorp! For me, I just thought it was easier to manage one loan than managing 2 loans when I don't have a security issue with either property.

 

@Debbiew_74

That refi may have caused more problems than it solved. The structure you have is really awful and will make it very difficult if you ever sell, for a couple of reasons.

Thankfully, being on IO should make it relatively easy to fix - but please get it sorted before you change to P&I! You'll need to use a broker that understand the issues so going back to the broker that did this for you is not going to have a good outcome.

 

I don't have any expansion for any future properties as I am riding solo so it would be to much of an overcommitment for me to buy another property. I also don't have any future plans of a PPOR as I live in the city and want to stay there.

 

Why is this structure awful. I don't plan to sell them anytime in the future. I will have the loan paid off in 7-10 years so selling will not be on the cards. These are investment properties for the long term, well until I pay them off.

Does that make a difference?

 

Yes, life circumstances and plans could change.

In the current state, there is no flexibility, especially if you decide to expand your portfolio / investments.

 

So my properties are worth $1.1m, I have a $700k loan with $230K in the offset on a investment IO loan (for 2 properties) and if I stay on this it is going to increase by 0.4% on 1 November

Would you recommend I refinance and split the loans even if stay with the same bank before going to P&I (as its a better interest rate).

I have no issue with repayments as I am on a very good wage and have been paying off slightly more than P&I by putting all my excess wages in my offset.