INTEREST only ,why?

I put this into the "Accounting" section because i would like some advice on "when its appropriate to put a IP on a IO Loan?


Is there any benefit taxation or otherwise? or negatives?

Negatives will be not paying off the principal i imagine and never owning it?
positives will be reduced payments on the Loan?



Should you only put a IP ON A IO Loan if you think its going to go up in price or it doesnt really matter?
obviously it wouldnt be good to buy a house in the Country that doesnt rise in value much,would that be correct?




I ask because when im going for my next IP Loan i like to buy another City apartment and will the IO Loan be better for reduced payments?

 

Reason = To preserve cashflow. The trade off is you dont acquire equity from repaying debt only from property price increases. Typically a investor will acess less than 80% of that type of equity where when they aslo repay debt they can access 80% of the combined price rise + debt reduction.

(Subject to lending limits of course eg servicing, capacity etc) Note that many lenders will cost your loan at a inflated interest rate AND assume P&I even when you are on IO

A good broker is a good resource in such instances. Their knowledge is of great help

Another strategy for tight cashflows can be a PAYG variation so that your regular pay has less tax deducted (instead of a large end of year tax refund). It just brings forward your expected larger tax refund from IP rents into your pays. Cost v's benefit needs consideration.

 

Possibly the main reason is so you could divert funds to paying off non-deductible debt first.

 

If you have cash to pay off your property of say $X over Y years, then you can either pay it into the loan and then generally it is harder to access and if you re-borrow it is only tax deductible for investment purchases, or you can put it in an offset, and later you have access to it (the full amount) and when you use it for anything (investment into other property or shares - or even personal expenses such as a car or for early retirement), the extra interest from taking that money out is tax deductible. In the meantime when the cash is in there, you are paying the same interest as if you had put it into the loan. So just because you are paying IO does not mean you are not paying it down (well technically it does, but it has the same effect). The cash could easily be "off-setting" the loan. The only difference is that you have access to it whereas if it is in the loan it is difficult-to-impossible to get a lot of it out.

The main problems with IO are not about not paying off the loan, but rather
1. If you are undisciplined and go and spend your money on stupid things like an expensive car or holiday with the cash you put in the offset instead of paying down the loan, then in this case having it locked away is better;
2. In the current rules IO rates are higher but I think this is already coming down. If you have a choice for the same rate, I would go with IO always. If it is 0.1% difference I would say the same. Half a percent and P&I is looking attractive if you can afford it, since more money goes to pay your principle that would otherwise disappear into interest.
3. If it is a PPOR instead of a an investment, then paying down your PPOR loan (ie P&I and even additional repayments if possible) to then withdraw and invest with will make the interest on what you withdraw to invest tax deductible (called debt recycling). This is a good thing and not the same as paying down a loan on an IP.

If not a PPOR and if you are disciplined with your finances and the rate difference is very small, IO all the way. The benefits are just too big of having access to your cash. You can also manage cash flow to afford more investments which means more asset growth and resulting wealth (if you actually know how to manage cash flow that is).

 

One of the problems (now) with IO is that the lender may turn around in 3 years and insist it revert to P&I on a lesser term and other lenders may not refinance IO to IO or availability may become further limited than now. eg P&I now may be 25 years but in three years term will be 22 years.

A 4.5% loan for $100K over 25 years is $555.83. Over 22 years its $597 per month.
The 3 years IO lets say is $333 per month

A $500K loan could jump from $1665 per month to $2985 a month. And thats without rates rising. Allow a 2% rate rise and its $3564.

But if the cashflow savings are transferred to PPOR debt reduction ???? The after tax cashflow saving on the PPOR needs to be weighed up

 

And who knows what the lending market, rates, loan fees, property values and jobs market may look like in the future.

 

Use an offset to mimic repayments of principal. Then can pull it out for next IP. BUT pay down non deductible debt first.

Need to think about your after tax cost of capital.

 

What would the best strategy be if I am buying my first PPoR that I am unlikely to retain as an IP long term and more likely to sell on in the next 5 years? I don't believe current IO and P&I rates are on par am I right?

 

Go for the lowest interest rate which would mean PI probably. - but still good to use an offset, instead of paying down, as you might change your mind.

 

Thanks Terry so you mean P&I, make the minimum repayments and anything extra that I may use to pay down the mortgage instead put into an offset?

 

yes