P&I vs IO loans

Hi all,

Looking for your opinion on the impact of P&I and IO loans given the following strategy:

Purchase a property as a PPOR and build enough equity and/or savings (value growth, renovation, higher income etc.) to purchase another. The plan is to then repeat the process for as long as the loans remain serviceable.

Now, imagine you can get a P&I loan at 2.8% without LMI or IO loan at 4% with LMI ($25,000) and an offset account used for the difference between P&I and IO payments (keep up with the loan as if it was P&I but keep the money in the offset rather than repay the loan).

In 5 years with P&I, the principal repaid would be $75,000 (which would bring the LVR to 80%) but there would be only $60,000 in the offset with the IO loan (due to the difference in interest).

Assuming there was no other growth in the equity, which one would better align with the strategy stated above:

1) P&I - pay down $15,000 more, save $25,000 on LMI but rely on the equity growth and savings to purchase another property - how could one access the equity without cross-collateralisation? What other options would one have at that point?
2) IO - $60,000 in offset which could be used (together with savings) to purchase another property.

Looking forward to see which option would you go for and why.

Thanks all for your insight!!

 

Why is the difference in rate so high. I would be Keen on PI at that spread

 

Agree with Terry here. The 2.8% P&I rate is awesome, but maybe run the numbers for the IO-scenario with a rate of say 3.5% or 3.6%? I just re-fi'd some investment-IO loans over to Macquarie Bank and with them was able to get a 3.59% rate + 100% offset facility per-mortgage (all mortgages are stand-alone, not x-collateralised).

 

Thanks for your inputs Terry_w and C-mac.

I checked with 3.59% IO rate and the difference in repaid principal after 5 years is approx. $8,000 plus there is still the $25,000 savings on LMI.

I have one more question, is there a way to access equity without cross-collateralisation?

 

Yes, this can be done quite easily.
Release equity secured by Property A ONLY, use for deposit and costs to purchase property B. The properties remain uncrossed.
Assuming you have the equity in Property A available

 

Just wondering, why would the P&I Loan have no LMI but the IO Loan have LMI? Are you talking about getting two different loan amounts? ie. More on the IO loan which is why it would have LMI?

 

Could you please point me into the right direction so I can do more research in that area?

 

Release equity secured by Property A ONLY, use for deposit and costs to purchase property B. The properties remain uncrossed.

Speak to a broker, the sooner the better, especially if you're going to try to do this to build a portfolio, not something you can do yourself or via one bank.

 

No, the same amounts. Looking at First Home Loan Deposit Scheme (FHLDS) where you pay no LMI up to 95% LVR.

 

I'm not aware of any lenders that would offer a 95% interest only loan. Best case is a few lenders offer 90% IO investment loans, but even those are few and far between.

 

Yes, in my initial post I am referring to 90% LVR owner occupied loan.

 

If it's the same loan amount and same LVR then they would either both have LMI or both not have LMI. Just because a loan has P&I repayments doesn't mean you don't have to pay LMI.
*I see you're talking about the FHLDS - I assume this needs to be P&I for no LMI to be applicable, apologies*

 

FHLDS requires the loan to be P&I.

You mentioned you're "saving" 25k in LMI with the P&I scenario, but if you're considering FHLDS, you're not going to pay LMI anyway. I'd opt for P&I and park the rest of the money in offset.

 

That's right, only P&I offers no LMI. Trying to see which one works out better. The P&I makes much more sense from cost savings perspective but don't want it to limit my options to buy another property in the future.

 

Yes, the question is do I go with P&I and save on the LMI and interest thanks to a lower rate OR do I take IO with higher rate and LMI but the option to save quite a lot more in the offset that can be used to purchase another property.

 

When are you looking at your next purchase? You could go with P&I now and when you're ready to purchase your next, refinance to an IO loan (If equity allows for 80% lvr).

 

Yeah that is certainly an option I am considering if I go with P&I. I would like to buy another property as soon as possible and I am worried that the P&I might set me back by at least a couple of years.

 

I suspect you're not going to get an IO, 90% owner occupier loan approved. There's a few lenders that advertise rates for IO owner occupier, but they won't approve the loan and tell you it will be fine if you opt for P&I.

 

Thanks Peter, let's assume I was able to, which option would you go for?

 

Based on my calculations it would take ~ 5 years to get to 80% LVR