Interest only loan

I dont know anythung about interest only loans but i guess they are more for capital gain investments ?
Im wondering if its better for me actually put 20% deposit down on a City apartment and borrow the rest on interest only, im sure after 2 years the value would have risen.

Is that why investors go for interest only loans? What are the advantages?

 

1. increased cash flow for more ip purchases
2. better serviceability with some banks that treat that debt at actuals or slightly loaded rather than a p+i loan
3. u can always pay more into the loan if u want to, even at the p+i repayment rate, but i/o gives u flexibility should u get sick,want a holiday etc etc...

 

Don't buy yet. Spend a few months on here. log on every day and check new posts, that's what I did before I purchased. You have heaps to learn.

The main one is tax. There are some pretty knowledgeable tax experts who would be able to explain this very well but essentially...

You will have a PPOR or some other form of debt. You have an IO loan because you pay extra on the debt that is not tax deductible, being the loan you have for the house you live in.

So instead of paying of the principal on your investment you leave the loan as high as you can so that you can claim as much as you can on tax. The money you would otherwise put on your IP loan you put on your main residence loan.

There are a whole different bunch of even better ways to achieve this, such as offset accounts, but that's the basics.

If you have no other non deductible debt, there are still advantages to an IO loan and you would set up an offset account and make extra payments into your offset account instead.

Learn how it all works and understand as much as you can before you part with your cash

 

Yes thanks guys , I didnt know you could pay more off a interest only loan , so that helps when i can choose if I want to pay more some months.

Yes i will have to see a Accountant if i had a interest only loan as i know nothing about taxes etc

 

IO gives you the ability to maximise deductible interest and reduce non-deductible. If you have a PPOR, rather than paying both off your loans P&I, you're much better off paying the IP loan IO and funneling the saved money into your PPOR (or ideally an offset attached to your PPOR).
You'll pay off your home much faster and retain as many tax deductions as possible.

 

Tread carefully before paying extra of an IO loan, it can have negative tax implications. It is better to create an offset account against the loan (well actually as stated earlier against the house you live in, but if you don't have this debt then set it up against your IP) The money you put into the offset account will lower your interest repayments. It's like paying it off without the money going into the actual loan account. Once the money goes into your actual loan account, if you decide to pull it out again to purchase anything that isn't another investment it loses its deductibility. If it sits in the offset account the money does the same thing as if it were paid onto the actual loan, but taking the money out of the offset account wont hurt deductibility.

Seriously though, read 2-3 posts on this site everyday and in several months you will have learnt heaps.