IO to P&I

Hi all, do you extend your IP loans back to 30 years once your IO period ends to reduce repayments? My ING loan became P&I last year & the rent is nowhere near covering the repayments! My Westpac loans will need to become P&I in 5 years. How do you manage this? I'm struggling to see the benefit in keeping all of my IPs at the moment. The rent may finally cover repayments only for the loan repayments to increase once P&I!!! Are people in this current market aiming to pay off their IPs now or is it still 'don't pay off your IPs & keep your cash' mentality? Thanks in advance.

 

You wouldn't want to pay PI if you have non deductible debt as you would be losing tax deductions.

For servicing and other reasons it is good to consider extending loan terms back to 30 years whenever you have the chance.

 

A 30 year loan with a 5 year interest only period will automatically revert to a 25 year principal and interest schedule after the IO period ends. This is why the payments are quite high (and incidently why IO loans tend to affect your borrowing capacity more than P&I loans).

At this point there's a few things that can be done:

1. Suck it up and leave it as it is. Sooner or later the bank is going to want you to repay the loan. Hopefully your rents will eventually increase to the point where the holding costs are covered. Not the most tax effective strategy.

2. Extend the IO period with the existing lender. The problem here is that in another 5 years your loan will be on a 20 year amatorisation schedule, which is only going to cost you more.

3. Refinance to a different lender. This can have some costs associated with it, but it does tend to reset the loan term to 30 years.

Most people tend to go with option 2 when the first IO period ends, then they look to option 3 after the second IO period expires. After that I think there's actually merit in starting to pay off the loan if it's a long term buy and hold.

 

How many loans do you have?
It would be worth spending some time with your broker going over this - depending on your income/serviceability you may or may not be able to extend IO periods. Best to discover this now so you can plan for when the loans you currently have come off and make any changes required.

 

Worthwhile read given your situation for more IO loans- Loan Tip: Ticking Time Bomb of Interest Only Loans Expiring
Naturally it's from @Terry_w!

Have you looked into ways to increase the rental yield?

Might be worthwhile to do a PAYG variation to help with the cashflow.

 

When building a finance structure for investing - an important part is weighing up your interest only expiries, the lender's policies on rollovers and how to mitigate P&I rollover risk over the medium to long term. This can be a combination of using lenders which have simple IO rollover policies and or refinancing of debt internally or externally dependent on your serviceability.

Long term many investors who have cleared any personal debt may consider rolling some loans to P&I to deleverage and grow into a far stronger cash flow position during their consolidation to retirement phase.