P&I vs IO for an existing PPOR - Advice please

Discussion in 'Loans & Mortgage Brokers' started by mukailv, 13th Sep, 2019.

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  1. mukailv

    mukailv Member

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    Hi guys,

    I have a question about P&I vs IO for a PPOR that we plan to turn to an IP in 5-10 years to purchase a different PPOR in a more desirable location. Could you please give me some advice?

    Our details:
    We are based in Sydney.
    Me $120 000/yr
    Wife $100 000/yr
    We both salary sacrifice $300/fortnight each to the super accounts
    PPOR Loan amount $690,000 3.69% P&I (The purchase price was $780,000)

    We plan to purchase another PPOR at around $1.4 - $1.6m in the next 5-10 years.

    My question is what is the best option? Is it better to go interest only so we can save more deposit for the second PPOR? Or is it better to go P&I for the next 5-10 years so we can have more borrowing capacity?

    Any thoughts would be appreciated guys!

    Thanks so much!
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    What is the rate difference?

    Show me your calcs.
     
  3. spludgey

    spludgey Well-Known Member

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    What area is the existing PPOR in? What would be the rent?
    How sure are you that you'll buy another PPOR?
     
  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    And how sure are you that you will be able to service both the current loan and a future loan?
     
  5. mukailv

    mukailv Member

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    We are currently going with 3.69% fixed rate for two years which ended next year. We are looking to refinance next year to standard variable rate interest.
    I will use an example of rates from a bank to show you the calculations as we haven’t checked which bank offers the lowest rate:
    P&I: Standard variable rate of 4.33% which has a monthly repayment of $3427
    IO: Standard variable rate of $4.82 for 5 years, which has a monthly repayment of $2490
     
  6. mukailv

    mukailv Member

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    That’s actually one of our concerns as well. We are definitely keen to buy another PPOR in a better location (better schools) in another 5-10 years.

    We are thinking of renting in the other location in 5 years when our expected child will go to primary school, while renting out this PPOR. We hope to accumulate enough deposit to purchase the second PPOR in that location. If not, we will sell the first PPOR within 6 years so we don’t have to pay CGT.

    However, we are not sure whether it is wise to do so or keep both and try to increase deposits with IO on the current PPOR.
     
  7. mukailv

    mukailv Member

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    The existing PPOR has 5 beds, 2 baths and it is within 25km of Sydney CBD, near high school and 20 minutes from the train station. So I don’t think renting out is a big issue. The expected rent is about $650/week.
     
  8. Morgs

    Morgs Well-Known Member Business Member

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    You might just scrape in on being able to borrow enough for the existing and future purchase in the current credit environment, but things can change significantly in 5-10 years.

    It really comes down to your projections as to being able to build a 20% deposit for that $1.4m+ purchase. If you can do it with P&I repayments in place then you'll have a choice, otherwise it may have to be IO.

    You may also want to consider the optimal structure in terms of higher INV debt and lower OO debt. Just keep in mind not all lenders will accept IO repayments for OO.
     
  9. mukailv

    mukailv Member

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    So to have a higher INV structure and lower OO, you meant the more deposits put on the second property the better?

    Yes, we will look at the projections of our savings. Also, in 5 years, if we rent another place and want to use the 6 years exemption on CGT, we can’t claim any interest deductions or investment expenses on the first PPOR as it is still considered a PPOR?
     
  10. craigc

    craigc Well-Known Member

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    Basic answers only based on info given:
    1 - Yes, reduced non-deductible debt
    2 - No, income v capital account. See Terry’s tax tips, you still must include rental income & related expenses (including interest) in your tax returns, but for CGT you potentially have access to the 6 year absence rule to reduce your CGT payable.
     
  11. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Sometimes that logic means one should buy the cheapest new car with an engine and 4 wheels.......... even it doesnt really suit one's needs

    Loans aint loans

    ta
    rolf
     
  12. Travelbug

    Travelbug Well-Known Member

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    Do you have a deposit for the next house?
    Why not do IO and put the extra money in an offset. Then you can pull that or for the deposit and still have the whole loan on the first house as deductible debt. If you pay it down to will have a smaller deductible debt and a larger non deductible debt when yup but a new PPOR. Of course the difference in interest rates needs to be taken into account.
     
  13. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    The LVR is 88%. I think you'll have a lot of trouble getting an interest only loan approved for an owner occupied property at that LVR.

    The borrowing capacity also appears to be tight for the proposed purchase of up to $1.6M, although it's impossible to predict where that will be in 5-10 years. IO repayments now would make it harder to qualify at that time.