interest only properties

Discussion in 'Loans & Mortgage Brokers' started by sauber, 18th Oct, 2021.

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  1. sauber

    sauber Well-Known Member

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    Hopefully i have posted in the right area.

    Hey all i have a question about having your loan on IO. Is this a strategy for some people if so what the benefits of having a loan on IO, is just for CG or something else?

    cheers
     
  2. JetstreamVic

    JetstreamVic Well-Known Member

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    There are heaps of advantages. Once upon a time there wasn’t even a interest cost penalty.

    Some advantages include:
    Reduces the minimum commitment so that you can purchase more than one place
    You might have io for a current ppor that will become a investment - that way you can utilise all the money in the offset as a deposit for the next one
    Allows for investment in other vehicles.

    there are lots, depends what you want to do
     
  3. sauber

    sauber Well-Known Member

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    ok thanks, cause atm im up 100pw with 2 properties meaning id be up 5200 but putting it IO id be up 20k!
     
  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    It can allow you to minimise cashflow and divert funds to the payment of the non-deductible debt and to maximise deductibility of interest.

    But there are drawbacks such as lower serviceability with most lenders and higher rates too.
     
  5. Lindsay_W

    Lindsay_W Well-Known Member

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    Important to note though, it reduces borrowing capacity for the next purchase
     
  6. Lindsay_W

    Lindsay_W Well-Known Member

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    Many reasons to go IO on investment debt BUT what's the plan for that $20K?
    Do you have non-deductible debt (Owner Occ debt) you can direct it to paying down?
    OR saving it in the offset account for the deposit and costs for the next property OR something else?
    Ultimately what you use that additional cash flow for is important, I wouldn't view it as being 'up' as you're no longer reducing the debt, it's not free money.

    When switching a loan from P&I to IO a full credit assessment/serviceability assessment and application is required, a good time to look at what other lenders are offering for IO loans.

    Some investors plan to keep IO loans forever and never pay back the principal, it's a strategy many want to adopt but you need good serviceability to do that.
     
  7. MWI

    MWI Well-Known Member

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    Unless IO is fixed?
     
  8. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    not sure what part you are referring to but fixing doesn’t change anything in what I wrote
     
  9. MWI

    MWI Well-Known Member

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    I thought my broker suggested fixing our IO actually increased our serviceability. I suppose it depends on many factors?
     
  10. jins13

    jins13 Well-Known Member

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    What would you do once the interest only period ends? With some changes happening in the lending environment, you may not service to extend the interest only period. I personally think paying down debt is a good thing but than I have a pretty mature portfolio.
     
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  11. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    that might have been a few years ago?
     
  12. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    There is a danger that you could be left with higher payments as it would be based on a 25 year PI Loan instead of a 30 year PI loan.

    But there is a way you can have your cake and eat it too - in some but not all cases. You can structure your loan so that it is PI but you are paying interest only. get the benefit of lower rates, but not the same serviceability boost as going purely PI
     
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  13. MWI

    MWI Well-Known Member

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    Have been investing for 21 years, always with IO, not once yet declined so I would continue if permitted. Principal is not tax deductible debt so would dedicate this to other investments or elsewhere.
    Over time you LVRs will decline as CG increases if you do not extend your debt.
    BAD debt is bad but good debt is good, meaning deductible debt I don't mind paying IO if allowed even forever!
    Apply your money to further investment, but agree, it's personal emotional choice how one feels about debt.
    Most financially wealthy apply depreciations, good debt or leverage, when they can to utilize their tax position too. These are all legal ways to progress financially ahead.
    These reminds me as we just refinanced some loans and the lender gave 5 year IO and 25 years P&I to repay, so spouse would be 91 when he repays! It seemed so strange to me BUT it depends on personal financial circumstances as we do have various choices in exit plans.
    Don't you wish to structure so that you minimize your tax liability if you can?
     
  14. MWI

    MWI Well-Known Member

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    Not really about 1.5, but I think we had been on much higher % loans so it worked better the other way. We actually prepay interest in advance some loans so it was worthwhile to fix for quite few years around 2.5%. As I say, it really depends on ALL loans and personal financial circumstances.
     
  15. sauber

    sauber Well-Known Member

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    I'd probably pay down our caravan debt I guess if were to go IO. 70k and id wanna get that out of the way quick smart!!!
     
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  16. jins13

    jins13 Well-Known Member

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    Thank you but I'm pretty happy with my portfolio so I don't need to 'wish' anything. Best of luck to your investing journey.
     
  17. MWI

    MWI Well-Known Member

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    That's the game, to be happy and have choices!
    Best of luck in your journey too...
     
  18. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Today I came across a situation where fixing resulted in an increased borrowing capacity as the lender used a servicing rate plus 3% buffer on top which resulted in a slightly lower rate than that used for variable loans making serviceability a little higher.
     
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  19. sauber

    sauber Well-Known Member

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    hrmmm intresting......

     
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  20. jaybean

    jaybean Well-Known Member

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    This is such a good question and should be stickied, as it basically underpins so many strategies here.
     
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