Interest only or P&I? HELP!

Hi Guys,

I can't make my mind up to go with interest only or P&I?

Our details
Me $120 000/yr
Wife $38 000/yr 3days while kids are young.

PPOR dept $210 000 3.69% P&I suncorp

Investment property dept $545 000
50:50
Option 1 interest only 4.25% 5 years HSBC
Option 2 P&I 3.95% HSBC

My question is what is the best option? Is it better to go interest only so we can pay down our PPOR? Or is it better to go P&I, saving about $8220 in interest over the 5 years?

We have just exchanged contracts on the investment property. Our broker has made an error and submitted the loan paperwork as P&I instead of interest only which I had originally intended. The loan is fully approved for P&I now. We have 10 weeks settlement so plenty of time. Just a bit torn... Any help would be much appreciated.

 

I'd go IO while you have an OO debt to knock out. Just make sure you specifically put transfers in place so you don't accidentally spend the cash flow on shoes. Or motorbikes.

 

What Jess said... IO for the IP, so you can focus on paying down owner occ first.

 

Thank you very much for your response guys

 

Given the rate differential isn’t too large between IO and P&I I’d probably opt for IO in this instance.

Cheers

Jamie

 

If it was me, I would have IO loans with Offsets set up on both properties.

Then I would place ALL of my spare cash in the PPOR Offset and steer all of my incoming funds (my pay, wife’s pay, IP rent, etc) into the same account until it is fully chocked. Then, I would steer the incoming funds to the IP’s Offset.

But one needs to have good financial discipline and only use the funds in the Offsets for mandatory expenditure (food, power water, etc) and never for discretionary items.

In other words, basically treat the Offsets as if they don’t exist.

This gives one the maximum flexibility, especially if the PPOR becomes an IP in the future.

 

Just be very careful! IO does not extend the life of the loan, so you will be paying more per year in the following 20 years than you might think.

As people stated above, you may be able to save some money by going the IO route, but only if you're very disciplined with your money and have the income to cover P&I when it rolls over

 

I have a sister who bought a unit as her first PPOR with a P+I loan and over time, paid off it off.

Then she bought a house as her second PPOR, again with a P+I loan and converted her first PPOR to an IP.

So, now she has an IP with no (deductible) debt and a PPOR with non-deductible debt.

IMHO, not a smart setup and not the way I would have done it.

I have even suggested that she move back into her unit and rent out her house.

Her response “No way”.

 

Due to the rate difference I would suggest you consider pi on the investment as you can save interest. This will divert funds from the main residence but you might be able to implement a strategy of borrowing to pay the principal on the investment loan so that you get the benefit of both worlds.

You can also debt shuffle to get main residence rates on the investment, increasing this as the loan drops

Also add in extending the loan back to 30 years every 3 years or so.this will reduce minimum repayments

 

This is a full application though, right? So you might as well refinance, as long as there aren't any costs associated with it?

 

Yes. Good if you can do it, but prob best to work on the assumption you can't.

 

A question for the forum.

If you have been paying P&I for a number of years on an IP, and approach your bank to get (say) IO for 2 years, is it tick and flick (one pager), or do you get put through the full rubber glove treatment (as in a full new application). And I assume that being goodie two shoes and paying P&I for 10 + years (low LVR), no missed repayments, counts for zip. You apply for IO, you get the full treatment, end of story.

 

What is a ‘credit critical app’? That’s like a full application, right?

 

Credit critical means a full application.

There might be some exceptions depending on the circumstances, but you should assume that any request for additional interest only terms requires a full application.

 

Hi Terry,

Could you clarify on the first point about being better to go P&I? I thought the advice had always been go with IO and put the principal you would have paid in the offset of the non deductible PPOR debt, as the negative gearing benefits would effectively drop the IO loan to less than your PPOR rate?

I'm heading in a similar direction with a current PPOR part 1 yr fixed 2.19% until July 2021, and part variable 2.64% with offset, and have the option of an IP IO 2.69 3 yr or P&I 2.49% 3 yr fixed.

Thanks,
Olly

 

Get some specific credit and tax advice. The stragies vary depending on rates, tax rates, ownership and clients situation