I/O for IP.....is this always the best strategy?

Totally agree.

And to have a (good) strategy, one must be at least knowledgeable/educated and preferably experienced.

Yep, totally agree again.

We just had a split loan refinanced, to 5 years I/O and a 25 year term.

We were expecting a maximum of a 12 year term as we are currently both 63 years old. OMG, we will be 88 when the loan term expires.

 

One risk not explicitly highlighted is the plan may be to reset the loan term to 30 years after IO period with a refinance, but if lending policy changes or your situation changes resulting the inability to refinance. You'd then be stuck with high repayments.

If unable to meet the repayments then you could be forced to sell the asset or exit other investments prematurely that were made with the difference between IO and P&I payments.

 

Would resetting be cheap if staying with the same lender? Changing Lenders with a refinance cost me around $1800 recently

 

You often can do it with the same lender, but not always. In some cases, people may no longer meet their current lenders credit criteria. In other cases the lender may have policies or reasons for not extending the loan term.

 

Some lender will have promos where they give you a rebate for switching. I think the banks under Westpac umbrella may have had a $2k rebate recently.

 

A recent refinancing cost me $1,285 in fees but I am saving $8,334 pa in interest, so I am happy.

 

Great outcome, the exit fee of my existing lender (aussie) was 535 rip. But much happier to have the right structure for us now

 

So 20% reduction in borrowing capacity and I feel it's significant and going to be problem during the accumulation phase.

@kierank How did /do you deal with the borrowing capacity issue while sorting out the cash flow.

 

I am tight on borrowing capacity at the moment and also i was thinking to convert some loans to IO to build buffers to mitigate any unexpected risks.

 

I used to be a big fan of interest only, but I think @Peter_Tersteeg is on the money actually, that these days in many cases it may be better to have all loans on p&i.

It was an easier decision when there was no rate difference between the products, refinancing at the end of the IO period was easy and serviceability limits not reached. Last year I switched all my loans to P&I.

I think it also pays to remember that the principal component paid down is not gone for good. It can be accessed again as equity for other investments. For example since my loans have gone to p&i I've paid about $60k of principal. In the near future I plan to topup/set up new loan facility to re-access that equity which can be used as deposit for another IP, share investing etc.

This particularly makes sense for paying p&i on your primary residence, especially if you never plan to make it an investment property. Why would you pay a higher rate on interest only to save an IP deposit, when you can get the exact same thing by paying down the principal on your ppor loan, then when ready to invest setting up a loan split and redrawing that principal. The outcome is the same except you have been paying a lower rate for that period while better preserving your serviceability.

 

Not too sure what you mean.

Ours was a refinance on a 11-year loan, so no increase in debt.

After refinance, our cashflow was $8,334 better off due to lower interest rates.