P&I or IO

I have always had P&I on my PPOR and tried to reduce it's debt down using an offset account. I had no intention of paying down the investment debt until I got rid of the non deductible debt first. Now we are forced to pay everything down. I am now in the position of re-financing so I can complete some renovations on my current PPOR. I am torn as to whether I should just wait until I am forced to move to P&I on all my loans or as Peter mentioned above maybe start paying P&I on some to reduce the pain for later on. It's a crappy situation to be in.

 

People should try to figure out if they should start paying P&I now or wait until later. To do this you probably need to have a good understanding of what your ability to maintain I/O loans in the future. This may mean refinancing them across different lenders every 5 years.

Run some cash flow analysis across different P&I periods. Switching today, vs after 5 years, vs after 10 years. I've attached a spreadsheet that will help people understand these figures.

Also consider other financial aspects. Where's the job going? Likely hood of a pay rise? Personal life events (having kids)? Many people see these as a reason to have interest only loans, but they could be a reason to go P&I now, rather than make the problem bigger in a few years.

 

Thanks Peter.
I guess in an ideal world I would go with IO loans all the way as this allows me to purchase more properties and hold them. After 10/15 years I can sell a few to pay down some loans and be in a better position than paying P&I on only 1 or 2 due to the higher costs. The question is whether you can find lenders that will still allow you IO loans in a few more years time so I can just keep re-financing every 5 years or so.

As much as I would love to pay down all my debts it's just not possible.

 

I dont understand how i cant afford to pay pandi is any different from i cant pay if rates were 2% higher. Its not an excuse either way. The loan market is what it is.

 

I would personally prefer to do P&I. If you stay on IO long enough it will eat into a large chunk of your capital gains.

 

Paying principle on a loan doesnt change your cg?

 

I should have been more clear. If I stay on IO only for say 10 years, I will pay significantly more to the bank than if I stay same period on P&I.

There are a few interest calculators online.

A 30 year 500K mortgage with 10 years IO will cost about 75K more than same mortgage that is PI from day one.

So later if property is sold for 700K. If I utilised IO my gain will be 200K-75K=125K as opposed to 200K in P&I scenario.

Obviously this is a very crude example that doesn’t take into account the tax rebate , stamp duty and others. But broadly it stands.

 

Many seem to be offloading properties, well in Perth anyways. Copped a few clawbacks as a result.

 

I don't understand why you would invest in property without even considering paying down the loan in the medium term? I think it's cheap luck to only count on the market moving one way and interest rates the other.

The markets are working perfectly - if the changing regulation will force you to sell, then you'll sell the property with the worst prospects. Either way, why have your hand forced? Plan for the best but prepare for the worst.

The lenders you're refinancing to will be the first ones to change their security requirements too and are much more nimble in forcing your hand if things were to change based on how they securitise. At least the big banks still fund loans from deposits.

 

Use the extra cash flow to debt recycle and/ or generate additional income. Its necessary to understand associated risks I agree, but can work if you plan properly, know what you are doing and are disciplined about it.

 

Depends. If you're on IO, you aren't paying down the loan, but what are you doing with those extra funds? Are you investing them in high yielding funds? Or gambling them? Opportunity cost.....

 

Compounding interest is a magical. But in all seriousness it’s hard to beat the return the bank gets from you. The current low interest environment makes it plausible, but it’s unlikely to continue.

 

Also to consider is the interest rate difference between interest only and principal and interest repayments.
Because the interest only rates are so much higher it's often marginal now whether it's worth it to insist on interest only from a cash flow perspective.
For example:
$400,000 loan principal and interest at 4.4(ish)% = $1502 per month
vs
$400,000 loan interest only at 5.1(ish)% = $1275 pm month
So only $227 difference in cash flow per month.
Times are a changin' folks - time to consider P&I repayments on investment loans.....

 

Considered borrowing to pay the principal component of investment loans?
(seek tax advice before trying)

 

I feel that the times for people wanting to aggressively expand is coming to an end and if people are still thinking that they can aggressively expand in the current climate, need to prioritise their goals again. We can play the blame game but the rules of the game has changed and people need to realise that.

 

Exactly, this is the conclusions I came to. With the rate differential between IO and PI, it was only about $5,000 pa in loan payments to pay off $12,000 pa in principle..

 

What if there’s a recession and you lose your job and you suddenly need to pay P&I and can’t refinance? Or you get sick or you have triplet kids?

Some risk mitigation must be considered as well.

Many people who become too greedy with their investments end up losing badly when something uncontrollable happens.

 

Hi Lucky Lad,
That's when you sell your investment property and focus on the important things in life.
And that's why is so super important to do lots of research here to make sure you get a great investment property so that you can offload in a hurry if you need to.
Nonetheless hoping for a smooth year for all!
Cheers, Medine

 

Well in the case of a recession that could be a fire sale and you end up losing.

People need to keep some buffers and wriggle room.