P&I (front-loading) vs IO break even point?

Hi finance experts,

For same loan term (eg: 20 years), how do I work out if P&I or IO is the better way to go based on
the following two factors: A) interest rate difference, and B) years of staying with the new lender?

P&I has front-loading so during early years of the term, maximum interest is incurred in the monthly
repayments vs IO. Plus, I suspect different lenders use different front-loading amount as well?

The purpose of the question is to help me answer the following:

If I were to refinance loan amount $L from lender A (IO rate X%) to B (P&I rate Y%), where X > Y,
what is the minimum duration (M years) I will need to stay with B to make the refinance worthwhile
and actually saves me interests over M years?

Any such calculator or spreadsheet exists?

Thanks,
FXD

 

First you have to define what you mean by 'better'.
cash flow v interest savings.
Do you include tax savings, do you include increased serviceability etc.

I tried to work it out once and all that I worked out was that it was too complex for my excel skills.

See
Loan Tip: IO loan or PI with lower rates? IO loan or PI with lower rates?

 

M=0. You immediately start saving interest once you move to a lower interest option.

Your repayment as a whole will be larger as there is a principal component, but you should count this as equity in the property and a hit only on cashflow, not networth.

The "front-loading" phenomenon you describe is simply the fact that the interest component of the total P&I repayment is larger at the beginning of the term than at the end, where it reduces to zero along with the size of the borrowing.

 

Keep things simple.

Define your goal first before worrying about interest rates and all the other stuff..

On scale of 1 to 10, interest rate is the important but it's not the no. 1 thing to worry about. More important is what are you trying to achieve or what the end goal is??

Happy to chat over the phone or inbox if needed..

Cheers,

 

Well said buddy!!..

 

There's a lot of different metrics you could measure this by, but you need to start with calculator that easily allows you to figure out different repayment schedules.

Take a look at the attached calculator, it does give you an actual dollar figure for a simple calculation. It also shows the cost of a compressed P&I period after the IO period has ended.

 

I read that tip and then went on to your Tax Tip 46 which is more relevant to my ask about 'better'.
However, it seems that one has gone without firm conclusion if it's considered legit ... or perhaps
I can't fully digest if any conclusion has been formed.

Rgds,
FXD

 

Great thanks very much for your generous sharing, will have a go at it.

Cheers,
FXD

 

Is that the tip about paying io on a pi loan? If so I know of no one who has done a private ruling

 

Yes