Loan Strategy

Hi all, just looking for some opinions on the following

Looking at purchasing an IP for about $560k
The loan will be at about 90% LVR
So the broker said you typically don't have an offset on an IP because you can work with the tax
But would one typically pay down the P&I as much as possible (extra payments) in order to be able to look more favourable to lenders when it's time to refinance? Being hopefully under 80% LVR sooner rather than later?
Or just pay what is required and have a little savings that can possibly be used for opportunities elsewhere?
We also looked at interest only in the event that we drop down to one income with kids but would that be worth it to positively gear it so fast? We're only looking at a $560k purchase due to wanting to start a family in the coming years, so I don't think having it negatively geared would be that big an issue. We should be fine with our cash flow.

But again, I'm new to all this. Would love to hear thoughts of those with experience to people that have been in a similar situation and what way you went and whether you think it was a good choice.

On a side note, does anyone have a blank or template cash flow projection excel doc or something I could get my hands on?

Cheers

 

Hi Yani,
If it's your only property, and you'll have a decent amount to put in offset, you'll definitely want an offset.

You definitely don't want to pay P&I and pay off more than you should - this is why you'll want an offset.

Get an offset, and save anything extra into it.

The only reason you'd want to pay it off while you're in accumulation phase is because you're planning to live in it long term. And even then - plan change, so use an offset

 

It will depend on a lot. Do you have a main residence with non-deductible debt or are you planning to buy one?
If so I would want an offset on the IP loan and not to pay any extra off it.

 

Very basic response = Stash the additional cash in the offset against the loan, rather than paying down the principal and having to ask the bank to release it for future opportunities, the cash is there when you need it in the offset, go IO and let capital growth take care of the LVR.

Note that you can switch from IO back to P&I easily, however you cannot switch from P&I to IO without full serviceability assessment and potentially jumping through some hoops.

However I don't know your full financial situation and future plans/goals etc so based on only the info provided.

 

Thanks for the answer So offset on IP and decreasing interest is fine?

 

We are currently renting and will likely continue to do so. We may purchase a PPR as our second property if we don't go don't the rent vesting strat. But I think we'll want our own home after this one

 

Thanks for the response Lindsay. That makes a lot of sense! We'll do something like that I think

Thanks everyone for the feedback. Very appreciative. Made a lot of sense and helped put my mind as ease

 

The offset account will reduce the interest you pay. This is saving you money. Saving you money is a good thing!

The only question is if there's something better you can do with it. One example would be having an offset account against non-deductible debt, such as the loan on your own home.

 

In that case you will probably be better off using as little cash as possible on this one. The more cash you have for the new main residence the less non-deductible interest you will pay.

 

Yeah we're only putting up 10% for this one and will get LMI as well which is fine.

 

Sounds like we'll keep the offset against the IP until we get a PPR and then move it over to there

 

Yep

 

If you dont have an offset on the IP you should have redraw which logistically works the same on interest charged, but tax deduction wise will be different if you plan to use that money for an owner occupied purpose, in my opinion having an offset is better.

Banks don't really care if you go P&I or IO for investment, all they care about is if you have the ability service the loan or not.

 

Just keep in mind that having an IO loan will decrease future borrowing capacity vs having it P&I but might not be an issue if you have good serviceability

 

Why will it decrease future borrowing?

 

Because serviceability is based on the PI term after the IO period is over.
The minimum repayment on a 25 year loan is higher than that of a 30 year loan.

 

Terry has answered above
It's due to the way it's treated in lender servicing calcs, repayments based on the remaining P&I Term (ie. 30 year loan with a 5 year IO, repayments are calculated over 25 years instead of 30)

 

Would having an offset be worth a percent higher on the interest rate with annual fees?

 

you dont need to pay 1% higher to get an offset account

 

Depends on your individual circumstances but as Terry said, the rate difference is rarely 1% maybe 0.05% or similar but certainly not 1% and typically an annual package fee applies, between $248 - $395 per annum
HOWEVEVER the benefit of an offset could completely outweigh the slight rate difference as you build up funds in the offset, reducing total interest payable.