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Interest only payments or P and I?

Discussion in 'Property Finance' started by Amber83, 21st Aug, 2015.

  1. Amber83

    Amber83 Well-Known Member

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    I'm buying my first investment property.dont own the home I love in.broker has suggested having an offset account and paying interest only.do others do this?is this beneficial?how do you ever actually pay off the debt if it's interest only?
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yes, yes and doesn't matter if you paid it off or not as eventually you will have a house worth 10x what you loan is and the cash in the offset may be enough to pay out the loan at any time.

    I have written a post about this which I will tidy up and post tomorrow in the tax section.
     
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  3. Ace in the Hole

    Ace in the Hole Well-Known Member Premium Member

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    Like Terry says, you don't need to ever pay off the debt.
    Also, don't worry about not owning the home you love in, I'd assume most people renting don't either.
     
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  4. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

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    Be disciplined and make regular, ongoing contributions to your offset account.

    Cheers

    Jamie
     
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  5. wombat777

    wombat777 Well-Known Member Premium Member

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    Be careful where you buy. Ultimately you want some capital growth since it is equity you are trying to build.

    Be careful of some regionals & mining towns. Some have seen massive drops in value and will take a long time to recover.

    Focus on good locations, where there is demand for rentals ( low vacancy rates ).
     
  6. The Y-man

    The Y-man Moderator Staff Member

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    Aim to die in as much debt as possible. Not your problem thereafter. You can't take your money with you when you die - nor will debts come after you :D

    The Y-man
     
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  7. THX

    THX Well-Known Member

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    Speak for yourself, I'm getting everything buried with me :p
     
  8. Azazel

    Azazel Well-Known Member

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    For investment properties, interest only loans are the only thing I have done to date.
    As stated, the interest is deductible.
     
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  9. Michael.Knight

    Michael.Knight Member

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    Terry, when the IO loan expires it automatically reverts to P&!.... how long can u keep telling the banks Im only on IO for? Can they stop IO and force you to go on P&I?

    Also if the loan term is 30 years, and you go on IO 20 years.... then the last 10 years of the loan the bank says you gotta pay off the loan - thats 10 years to pay off the principal!!???
     
  10. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Michael - it depends on the bank. some you have to reapply with new payslips. Others will just extend the IO period. But this may be changing soon with the ASIC/APRA pressures.

    10 years to pay off principal may not be much to worry about. Imagine you had purchased a home in Sydney 20 years ago, borrowing 100%, and now had to pay the loan principal off over 10 years. The rents alone would probably do it in a few years.

    e.e. $300,000 property with $300,000 loan. Now worth $1,500,000. Rents for $1000 per week
    Repayments on a $300,000 loan, PI, over 10 years would be $3,109 per month
     
  11. chylld

    chylld Well-Known Member

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    Extend IO indefinitely if possible. If you are somehow forced onto P&I then you should have saved up enough cash in your offset to pay off most/all of the principal. IO isn't a licence to forget principal payments, it's a facility that gives you more flexibility with where those payments sit and work for you.
     
  12. Amber83

    Amber83 Well-Known Member

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    What chan
    What changes may be made with aprra?you think they will not allow so many IO payments?i still don't really understand the benefit of an offset acct...sorry,it's a bit over my head
     
  13. Amber83

    Amber83 Well-Known Member

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    Why should u pay interest only?im not really understanding this
     
  14. Amber83

    Amber83 Well-Known Member

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    I'm certainly not going to be buying in a mining town.using a reputable buyers agent to help me find a good location hopefully
     
  15. Amber83

    Amber83 Well-Known Member

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    Why do u do interest only?

     
  16. wategos

    wategos Well-Known Member

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    All my investment properties have been P&I. I like to see the debt go down. Too many people are inappropriately on interest only and are just using the saved payments to spend or speculate further, they will have big problems when interest rates rise and they haven't taken advantage of low rates to pay off some principal.
     
  17. Azazel

    Azazel Well-Known Member

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    You need to do some research, which might involve reading some books.
    It might seem a bit foreign at first like a "never never" loan where you will never pay it off by paying interest only. But it's deductible, so the closer you get in rent coming to mortgage payment going out the better.
     
  18. chylld

    chylld Well-Known Member

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    Terry_w likes this.
  19. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    def PI best on a PI 20 year term or less because ASIC and APRA guidance can be interpreted to suggests so .............

    the gov is always right ? .................. right ?

    ta

    rolf
     
  20. Tony Xia

    Tony Xia Member

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    I always recommend my clients structure their loan IO with an offset for investment or even owner occupied, obviously you want to claim the full tax benefits from negative gearing (if any) from your investment... But when you want to use that equity for your next purchase the cash is sitting right there and you don't need to take out another equity loan to purchase it.... One less loan to worry about