How do interest only loans work as part of a strategy?

A lot has changed in this thread started in Jan 2016. The main one being that IO loans are getting increasingly harder to get and the interest rates of IO loans have become much higher than PI loans.

Also because of the serviceability issues this should cause people to rethink their strategies on IO loans.

In many cases PI loans may be the wayt to go now, even on investment properties.

 

P&I would help me sleep at night, I find it stressful thinking I may have to rely on selling down to pay down one day. I'm refinancing to buy again and really am considering P+I on Ips for the sleep at night factor

 

But you don't necessarily have to sell to pay the loan down. You could pay it off without selling. The IO nature could be temporary until you have paid off all non-deducitble debt and then you could start paying PI on the investment loans.

Also consider that inflation makes a loan lose value over time.

Imagine you paid $16,000 for a property in Sydney say 30 years ago - which may be now worth $2mil.

If you took a 100% interest only loan and kept renewing it each 5 years for the past 30 years you would still owe the same amount - but is that an issue if you are getting say $40,000 per year in rent?

 

A good point.

 

Dont panic after 5 yrs u can ask the bank to extend the IO for 5 more years.

 

It's dangerous to assume that you'll be able to extend interest only terms in the future. Right now I can only think of two lenders that extend fairly simply (Westpac and CBA), and there's every reason to expect they'll change these policies in the future.

Furthermore extending only increases the problem. When you go from 5 years I/O to P&I the new P&I repayment might be as much as 130% of what you were paying when on I/O. If you've got a 10 year I/O loan, this only makes the problem worse, about 145%.

The common solution has been to reset the clock by refinancing to another lender. Some lenders have started shutting down that avenue by only allowing P&I repayments on certain types of refinanced loans.

 

Hi Terry

Can you please expand on this? I'm trying to get my head around this?

Cheers!

 

same house was $16,000 now it is probably $2mil today 40 years later - inflation and capital growth have kicked in. So it you had borrowed the full purchase price back them and had a 40 year IO loan it would be bugger all today.