Investment Property - Nrth Brisbane

Hey everyone,

You have been an amazing source of info and advice which is greatly appreciated.

I'm very new to this and have been looking into some options to purchase a place in Brisbane. At first I thought I would buy owner occupied but I've now decided to buy an investment property.

I'm just wondering if someone could please explain which I should choose - Interest Only or Principle and Interest. I always thought I'd pay both but I just read somewhere it's more beneficial to pay IO on the Investment Property.

Thanks guys
Kim

 

Hey Kim

Welcome aboard I've copied/pasted an entry from our blog below regarding IO or P&I - hopefully it helps.

A question we’re always asked is “should I be paying interest only or principle and interest on my loans?”

When it comes to claiming an investment loan as a deduction – only the interest portion of the loan is tax deductible. The principle portion is not. Therefore, if you have an investment loan, and you decide to pay off some of the principle each repayment, you’re effectively reducing this tax deductible debt – meaning there is less tax you can claim back.

This can be a costly mistake for those who also have non-deductible debt (which most of us do). This includes a home loan on your Principle Place of Residency (PPOR), car loans, personal loans, credit cards, etc.

If you want to pay down any debt – it is this non-deductible debt that you should try and knock on the head first. It simply doesn’t make financial sense to pay down your deductible investment debt when you also have non-deductible debt.

So what’s the ideal structure?

Generally speaking, it’s ideal to have all of your investment loans set up as interest only.

With your PPOR debt, there are two choices to consider. If you are a disciplined saver and feel that your PPOR will one day be turned into an investment property, then it's best to also set this loan up as interest only. However, it's important that an offset account is set up against this loan so you can continue to make the equivalent principle repayments regularly into the offset account. The offset account is also a very handy place for parking any spare savings.

Why is it best to have my PPOR loan as interest only if I think it’s going to become an investment property? Because this debt will become deductible in the future – so you shouldn’t reduce it now.

Instead, you can place your money into the offset account which will reduce your PPOR interest repayments whilst the funds are sitting in the account. When this property becomes an investment property in the future, you can move the funds from your offset account on to your next PPOR. This way, you've increased your tax deductible debt and reduced your non tax deductible debt.

The interest only with an offset account doesn’t work very well for someone who isn't a disciplined saver and will be tempted to simply make the minimum interest repayments.

If you're not a disciplined saver and have no desire to convert your PPOR into an investment property at some point, then it's best to have a principle and interest loan on your PPOR. Once you've paid off your PPOR loan and any other non-deductible debt, you may wish to start paying down your investment loans.

So in a nutshell, interest only for all loans with an offset account set-up against your PPOR loan can be a great overall structure – particularly if you think you might turn your PPOR into an investment property at some point. On the flipside, if you have no desire to turn your PPOR into an investment property down the track and you are not disciplined with money- then it’s best to have interest only against all investment loans and principle and interest against your PPOR.

Cheers

Jamie

 

Go IO with an offset linked to the IP if you dont have a PPOR debt.

If you have a PPOR debt then link the offset to that with all monies flowing in and out of this account inclusive of rent, salary, business profits (passing through a seperate business account first) and make mortgage payments from this same account.

 

Great post @Jamie Moore

There is IMHO one other consideration often overlooked. If you have no non-deductible debt (yes some of us exist!) & your strategy is to turn the IP into a PPOR at some stage then it "may be" appropriate to consider P&I. Also, some conservative strategies involving B&H and building big equity prior to buying the next may warrant considering P&I.

That said, my preference is always to use a product with offset rather than using P&I. Reason - you have immediate access to the faux equity... this also applies to PPOR for those that move around quite often.

There is no right or wrong here as it depends on individual financial situation & your investment strategy. IO with offset is a far more flexible approach though, that can be invaluable if your circumstances or strategy changes.... and they do.....

Enjoy the journey

Indi

 

Was reading a good article yesterday about IO vs P&I and think it was written quite well so worth a look to give you a better understanding of the whys
No, I’m not crazy… interest only please! - Australian Property Investor magazine

 

"There are some for whom it’s better to go principal and interest. These are generally borrowers who don’t have their cash flow under control and feel like they need to be forced to save. This is the only benefit of going principal and interest – the bank forcing you to save. I know I’d prefer to choose what I do with my money each month and if I want to pay my debt down, I will. If I need to just pay interest this month or use this money to cover short-term additional expenses, I will"

He nailed it right there ^^^^^.

Only one reason why you should go P&I and from years of experience with helping the good folks of SS and PC very few if any fit this category.

 

Surely you meant "only one reason why you should go P&I....."

 

Thanks, just fixed that.

 

Thanks everyone for your replies

 

Where in North bne are you looking?

 

Whitecat- I'm looking around Zillmere, Carseldine, Taguim & Fitzgibbon.

 

I can send you some information about northern suburbs and their growth if you are interested - many investors are experiencing strong growth in areas such as Arana Hills, Ferny Grove, Stafford Heights, Everton Park, Everton Hills, Mitchelton, Bracken Ridge...very exciting, the acquisition phase!

 

Can I have access to this information please? I am interested in suburb, Zillmere myself thanks.

 

Hey Kim,

Reading through old posts here and my eyes came across that you mentioned Zillmere, which is where I own my only IP at the moment (bought back in May 2015) hasn't seen much growth as yet but looks after itself

Where did you guys end up buying? Hopefully got into a decent sized block land house, you'll do well with potential development opportunities if you did!