IO or PI with lower rates? Sometimes it is necessary to get a PI loan rather than an IO due to servicing issues or go PI to get a much lower rates. These days interest only loans generally higher than the rates on a PI loan with a number of banks. So should you settle for an PI loan to qualify and/or save interest? Lets look at a theoretical example. Bank X $500,000 loan, 80% LVR Interest rate would be A 3.99% variable principal and interest or B 4.23% variable Interest only repayments on A would be $2,384 per month repayments on B would be $1,763 per month The difference is about $621 per month or approx $7,452 per year. However most of the difference is principal. The difference with interest between A and B would approx $1360 in the first year. So is it worth paying an extra $7,452 per year in repayments to save $1,360 in interest? Remember each year the principal on the Investment property loan would be decreasing by around $7,400 per year. This means tax deductions are also decreasing. Interest on $74,00 at 5% = $370. At 35% average tax rate this would be approx $135 per year in less tax back in your pocket. So it may be worth paying PI where the interest rate difference with IO is not too great. I am not sure how accurate my figures are but it may be possible to get the lower rate and not to lose out tax wise. See next my next tax tip.