Having a bit of a dilemma deciding if we should go with P&I or IO for our 2nd IP. From reading the PC forum and podcasts such as The Property Couch, I thought the advice had generally been if you still had a PPOR with an outstanding loan, to go with IO for the IP, and put the principal you would have paid, into the offset of the non deductible PPOR debt, as the negative gearing benefits would effectively drop the IO loan to less than your PPOR rate? We have a current PPOR part 1 yr fixed 2.19% until July 2021, and part variable 2.64% with offset, and have the option of an IP IO 2.69 3 yr or P&I 2.49% 3 yr fixed, variable in the low 3s. I've heard some members here advocate for P&I if cashflow allows given the benefit of serviceability to borrow more in the future and the extra repayments once IO expires unless you successfully refinance or extend the loan back to a 30yr P&I scenario. You also end up paying more interest in the longer term as you don't actually reduce your debt. In my situation, we are probably close to our limit anyway (after borrowing for this 3rd IP we will have an aggregate debt including our PPOR of nearly 6 million), although my wife will probably divest of her IP apartment which has an outstanding 400k. We do plan to see if we can hold our current PPOR and turn this into an IP in 3-5 years, and purchase another PPOR in Sydney's north shore. Arguably if i am using the principal saved with an IO loan to pay down the principal of my non deductible PPOR debt, is this more tax advantageous? If necessary to determine the best strategy, we are a 30yo couple with my wife earning 135k/yr but will be going on mat leave soon and return to the workforce in 9-12 months as part time 3 days/wk, and I earn 500-550k/yr. Thanks, Olly
Hey buddy, You answered your question on your 2nd paragraph. You would always pay down your PPOR non deductible debt first regardless if cashflow permits in my opinion ( based on current rates) If you punch in the numbers on an "extra repayment calculator" online you would see how much faster you can pay down your PPOR when you refocus the extra funds from not paying P&I from your investment loans. As an total aggregate lending youre still paying down your debts, it's just a matter of focusing on which debt youre paying down first
Considered borrowing to pay the principal of an investment loan that is PI? A surrogate IO loan on PI rates.
There really isn't a one size fits all answer to this question. An IO loan will significantly reduce your cash flow outgoing whilst it's IO, but the cash flow will take a hit later after the IO period ends. Lenders also measure servicing on the end period, so it adversely affects your borrowing capacity. P&I is going to be more painful at the beginning, but in the long run it's cheaper (the lower interest rate should give you a hint as to why). If you actively do something useful with the initial cash flow saving during an IO period, it's probably worth it. Examples might be reinvesting that surplus in something else, or paying off non deductible debt faster. If you're not doing something useful with the cash flow, you'll be better off with P&I. Some reasons I've heard for IO that I don't consider worthwhile: * Saving tax because you're not paying off the principal - the tax savings really aren't that significant and the extra interest paid will be more than the extra tax deductions. * Can't afford P&I repayments - if you can't afford the P&I payments now, you won't be able to afford the loan after the IO period. You proably shouldn't be borrowing the money in the first place.
Wouldn't this typically incur higher interest rates for your surrogate IO loan? But instead of paying the principal, you are borrowing more to do so, but paying IO. Wouldn't this still count as a liability that would affect serviceability?
In our case, we would be paying down my PPOR debt through offset with the principal saved, but if needed we could also c relatively comfortably afford the P&I repayments instead of IO. Would you say the based off the interest differential between the 2 products of IO vs PI, it would have more value and net saving to go IO then?
It would be PI rates Yes, but not as bad as IO and perhaps by not much at all as the non-deductible debt will be reducing faster.
You'd be paying PI rates on the mortgage loan, but if you borrow a separate loan to cover this, wouldn't you essentially be paying IO loan for the repayments? Would a lender actually lend for this as what security would it have? Or if not and it's seen more as a personal loan, wouldn't the rates and serviceability tests be substantially higher? Or maybe I'm completely misinterpreting what you're suggesting...
Its been discussed in this thread Tax Tip 46: Want to Pay IO on a PI loan? Tax Tip 46: Want to Pay IO on a PI loan?
