Interest only Owner Occupier loan still worth it?

Hi,
Inviting thoughts on whether there is still value in getting an OO interest-only loan for a property that I intend to convert to an IP in future?

I was going off the idea that maintaining the max tax-deductible debt is the way to go, however, the advice from my mortgage broker is that although this was a very common approach to do this previously, they no longer advise it.

Reasons being:
- the difference in interest rates for a P+I OO loan, versus an interest-only OO loan, are so significant now (~1%) as to negate the benefit of doing this.
- current interest rates are low and will likely be for the next few years, it makes an IP close to neutrally geared which then also somewhat negates the tax deducibility.
- paying down an OO loan now can increase the amount of equity I can pull out for a future purchase. Actually, this last one is not his advice, just my inference.

So, the recommended course of action is to take on a P+I OO loan with an offset account. Although I'm no expert, this makes sense to me.

What are your thoughts, ProperyChatters?

 

The reason to go IO is to maximise deductible debt if you move out of the ppor and it becomes an ip.

however.....
If the interest rate difference is 1% what it means is you are paying 1% extra (gone, no deductions) to keep the loan higher by 2% a year.

compared to going pandi. You pay 1% less and pay another 1%, but the 2% lowers the loan.

 

Yes it is still worth considering. I am not advising you to do it, just consider it.

 

Alternative structure = go Interest Only on the loan, stash the principal portion in the offset account, no need to 'pull equity' in future as cash will be available in the offset.
Also works better, tax wise, as the full amount of debt becomes Tax Deductible when you move out and convert to IP. Whereas if you pull equity for deposit on the next OO purchase that portion won't be deductible...(I'm not a tax adviser so seek specific advice)
It makes more sense to me than going P&I on a loan that will become deductible when you convert to IP but not one size fits all.

 

The amount of principal you pay down with P&I repayments isn't much in the first few years. The future tax deductions you miss out on in the future are related to the principal reductions over time from P&I repayments.

The cost-benefit depends on a number of variables, it's not easy to quantify in a general sense. The actual rates, your tax marginal rate, how long it will be until you move in, the opportunity cost of the money, are all things to consider. IO loans cost more becuase the rate is higher, but this needs to be weighed against the opportunity cost.

Overall in my mind I'd just go P&I, but that's not the best answer for everyone.

 

IO OO loans are generally more difficult to access (some lenders still don't like this much), cost a fair bit more (big rate spread on OO loans repayment type).

Overall our book of loans, which has probably recently weighted towards 'owner occupier purchases from investment minded' borrowers, has shifted dramatically in repayment type for OO's. The vast majority is P&I given the substantial pricing difference between the two. Some investors choose to have OO IO loans though and there are some products that cater to this better than others (usually based on large price differentials). In the past, when the spread wasn't there, there was a lot more that preferred/wanted IO.

 

The typical spread I'm seeing between variable IO and P&I for OO loans is 0.50%