Mortgage repayments

Discussion in 'Finance & Banking' started by pommie__, 5th May, 2017.

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  1. pommie__

    pommie__ Member

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    Ive just spoken to the bank , who informed me that within the next few months , the loan on investment property will change from interest only to P&I but i can switch back if I require>
    I am confused as to what is the difference and obviously i wish to reduce the mortgage.
    Any views on this ?
    Thx in advance
     
  2. Simon Hampel

    Simon Hampel Founder Staff Member

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    Interest Only payments are literally just that - you only pay the interest due for the month. No principal is paid back as part of your regular payments so the loan balance doesn't decrease (although you can usually make one-off payments off the principal if you choose).

    Principal and Interest payments pay the monthly interest owing, plus enough of the principal to eventually pay off the loan over the remainder of the loan term (eg 20 years or whatever is remaining).

    P&I payments will be higher than IO payments - so it will impact on your cashflow.

    But if you never make any principal payments, your loan never reduces - so you'll end up paying more in interest over time.

    So it comes down to a matter of:
    • IO = less cashflow required now, but will cost you more in the long term and slightly higher risk because loan balance isn't decreasing (but rising values will still help LVR)
    • P&I = more cashflow required now, but will cost you less in the long term and slightly lower risk because loan balance is decreasing and thus LVR will decrease, even if property values don't increase.
    Which is better for you depends on your strategy.

    To maximise your tax deductions and if you intend to sell at some point in the next 5-10 years, you may want to consider just keeping the loan IO - because the actual principal paid off in the short term is very small compared to the interest component.

    IO is also useful if you want to be able to maximise your available cashflow to purchase additional properties.

    Note that due to APRA changes, IO loans are getting more difficult to get and the interest rates are often higher than the equivalent P&I loan.

    So, the question is ... is your goal to minimise your debt on this property as soon as possible? Then P&I is probably going to be cheaper for you.
     
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  3. pommie__

    pommie__ Member

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  4. pommie__

    pommie__ Member

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    Thank you for the advice
    Yes I want to reduce loan asap and plan to sell when I retire , hopefully House prices will increase in the next few years
     
  5. Simon Hampel

    Simon Hampel Founder Staff Member

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    Well you still have a choice - you could always do IO and make your own repayments when it suits you.

    However, if IO loans are going to become more expensive, it may well be cheaper to just move to P&I. You should still be able to make additional repayments above that required if you want to reduce the loan balance more quickly.

    Check with your lender what your repayments are going to be if you move to P&I and make sure you can afford the extra repayments before you decide.

    You can get an estimate by using a mortgage repayment calculator like this: https://www.moneysmart.gov.au/tools...ge-calculator#!how-much-will-my-repayments-be
     
  6. Hosko

    Hosko Well-Known Member

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    On point again Simon, another good insightful post
     
  7. Corey Batt

    Corey Batt Well-Known Member

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    If the intention is to pay down your debt - definitely P&I. Not only does this 'force' you to pay down the debt, currently there are price differentials across the lenders which are increasing, so if you keep your loan principal and interest (P&I) you will get a cheaper interest rate than interest only (IO).

    Make sure you check how long it will take to pay down your loan with the requirement minimum repayment - this could be upwards of 25 years. If you intend to pay it down faster either increase your minimum repayment or just transfer funds directly to the loan account when you have extra cash available to 'save'.
     
  8. pommie__

    pommie__ Member

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  9. pommie__

    pommie__ Member

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    Thx for reply , all helpful info
     
  10. Simon Hampel

    Simon Hampel Founder Staff Member

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    It would also be worthwhile double checking what you are allowed to redraw from your loan - if you are putting all your spare cash towards reducing your debt but then have some kind of emergency and no cash available, you may need to draw down some money. Best to check you will be able to do this for any payments you make above and beyond the basic P&I payments.

    Of course this has tax implications if it's for personal use on an investment loan - so care must be taken.

    If you have an offset facility on the loan, just park any spare cash in there instead (and resist the urge to spend it - except in a genuine emergency!). Same net benefit as making additional payments and no tax issues from redrawing.