P&I or IO investment loans?

Good advice so far - thanks.

Step 2: what is the best course of action once the IO period expires?

 

2 Options
1. Extend it
2. Pay PI

If you have to pay PI, then pay the minimum

 

How easy is it to refinance with a different lender if the current one chooses not to extend the IO period?

 

If the assets were unencumbered then you wouldn't need to be borrowing to fund lifestyle nor have the interest expense.

 

Depends on serviceability and LVR as a start.

 

Very easy if you can service.

 

Thanks

 

Thats true.

But imagine you have a $500,000 property with $500,000 in the offset. You could pay the property off any time. But what if you needed $100,000 in a hurry (for that sex reassignment surgery that I the lastest craze perhaps)? You could take the money from the offset and claim the $5000 per year as a deduction.

But if you had paid down that property loan so that it was now unencumbered you would have to borrow that $100,000 (or remain living as a man) and the interest would not be deductible.

 

But keep in mind that in 'retirement' you will probably not be able to service.So there will come a time when your loans do revert to PI and your cashflow will reduce. Saving in an offset can help ease the impact with this.

 

Can be true but, in our case, we have taken out our largest IO loan ever and we are retired.

As always, it is about security and serviceability. Banks aren't totally stupid.

 

All good points .
I have always been the type to have P and I for all of my loans. I personally hate debt and I have never bought an IP to assist with my tax 'etc'. I have always bought property where even at P and I would not be loosing cash flow generally I would be breaking even. Even with this model, my wife and I paid off our PPOR two years ago at the age of 31.

I also don't like LMI for properties as well lol but call me old fashioned.

 

Im pretty new to the real estate game however i have a paid off ppor at 33 years of age valued at 350k.

Wondering on the best approach to get my 1st ip, i would normally try and get p and i loan to pay it off sooner so its uncumbered yes the income would be taxable at my marginal rate, i jus hate debt!

Any chance of p + i with full offset! Im not in melb or syd with rocketing prices and cap growth, i know going p+i i will lose my tax deductions quiet quickly! Does the offset help here on any way??

The other option is the IO with full offset but im pretty scared that i never actually own anything even with the lower monthly outlay! Like i said would IO be recommended for tasmanian or south australian property markets for example!

Say after 10 years of IO with full offset on a 250k unit with i still owe 220k with 200k on the offset what do ppl recommend then??

Sorry for the elementary questions i will start combing through the threads!

Cheers!

 

To me the answer is obvious...

You need a mindset shift, get comfortable with debt, and have confidence in if you buy somewhere with demand, it will go up in value. (You need to research this throughly before buying though!!) Let time and inflation make your original loan a lower LVR.

There's good debt and there's bad debt. Debt for IPs is "good debt".

I recommend you buy your IP as IO only, with offset. After that, keep learning and you'll buy a second.... using released equity from the home or the IP (or both).
Congrats on paying off the PPOR though

 

And what about down the track of the loan is still 250k for example and i have 180k in offset what are ppls directions then?

 

BTW my sister has jus organised a p+i investment loan for a 2nd ip with a fully paid off 1st ip as well as paid off ppor!

Can she make it work at all with p+i instead of IO i know she misses out on tax deductions can she make it work at all with an offset with the p+i loan?!

 

She can... I just prefer to have more IPs and a bigger portfolio. For example, let's say you have investments worth 500k and it goes up 5%, you have 525k at the end of the year. What if you took your money and had 2mill of investments instead (using leverage ie. OPM - Other People's Money)? Let that grow for a year at 5%. At the end of the year you'd have $2.1m. I don't know about you, but I'd personally prefer to have the 100k over the 25k gain.

You need to buy the right investments though, and understand the risks of your investing.

 

Point taken! However my sister is very risk averse, must run in the family!

She is content on owning the 2nd ip outright to go with the first and pay the tax on her marginal rate!

Any ideas how to help minimise tax or assist with her p+i loan, i was thinking having a full offset to lower interest?

 

Get her along to a meetup to chat with investors.... and maybe get her to read some books or go to a seminar (don't encourage her to sign up to pay for anything though, but go for the education.) A light might go off in her head, but at this stage she just needs to see the numbers down on some paper, and to understand how to invest safely.

 

Will definately mention this to her! But she just wants to pay it off, thats why i was thinking holding abit in the offset will help her out and give her some flexibility for when/if life throws her a curve ball, even tho she has a higher outlay in p+i compared to IO!

 

@pippen i don't think paying off debt is a bad thing at all! Some people will say never go P&I on an IP and that was me a couple of years ago but at the end of the day the end game should ALWAYS be to have no debt.

The only reason it's a bad idea is if you:
A - Have Other non deductible debt of which that should be your focus.
B - Have plans to get some new non deductible debt (e.g buying a new PPOR or new car.etc)

It is highly likely that at some stage B will occur but leaving it in an offset you also run the risk of spending it!
No doubt keep a nice cash buffer but if you have the capacity then I have no issue with P&I on an IP.