P&I vs IO Portfolio Serviceability

Hello all,

I have a portfolio of properties with which all are currently IO loans with 1 or 2 properties coming up soon with the IO period ending.
I’m looking to maximise the serviceability across the portfolio for another possible purchase.

I’m hearing conflicting theories as to weather IO or P&I provides better servicing?

IO provides better servicing in the sense of actual repayments at the time but then P&I better with the life cost of the loan which banks seem to be calculating.

appreciate any insight on how this can impact a portfolios serviceability thank you

 

PI back to 30 years would give you a much better boost in most cases. Best to speak to a broker.

 

Almost all lenders assess your debt at a sensitised P&I rate and at remaining P&I term

if you started at ground zero and looked at a 300K 30 year loan at a rate of 2.5% P&I as an example

For a P&I loan the bank will assess your capacity to repay at 5% P&I ( which is 2.5% plus a 2.5% buffer) over 30 remaining years

For a loan where the first 5 years is IO, the bank will assess your capacity to repay at 5% P&I ( which is 2.5% plus a 2.5% buffer) over 25 remaining years

IO provides better cash flow for sure. But on a servicing calc (except for some limited exceptions) IO debt has a reducing effect on capacity.

There are some limited exceptions to this at lenders such as Liberty or Pepper or Bluestone, where they continue to offer "old school" or "pre APRA" or "near APRA" servicing under some circumstances ( exposure, LVR etc) . You will pay for the privilege of "old school" calculators though

 

Majority of lenders assess your repayments based on the remaining term of the P&I.

So if you apply for 5 years IO, your loan will be assessed at 25 years P&I

Some third tier/non confirming lenders will use actually repayments plus a buffer, but its rates are higher.

Thus as a whole, P&I repayments will provide a better lending capacity, but obviously P&I isn't always the best structure for investments.

 

My bank manager told me just 2 days ago it makes no difference for service ability or interest rate but for best cashflow it is better to fix with IO. You are better to invest elsewhere, than pay down loan and effectively grow a rapidly increasing offset. that will dwarf your loan in 10 years, if not 2. Buggered if I no why people get hung up on loan length as I have noticed all my loans have been refinanced after 6 years even after looking impossible at 5, One extra year of compounding works miracles.

 

That's not right, it definitely does make a difference when it comes to serviceability.
Example - you have a 30 year loan term with a 5 year interest only period lenders will assess repayments on that debt over 25 years Vs if you have a 30 year P&I loan the repayments on that debt are calculated over the 30 year term.
The shorter term means the monthly repayment amount is higher on the serviceability calculator, which reduces the amount of any potential new borrowings. If you have plenty of serviceability anyway it might not be an issue but IO certainly does make a difference.

 

What bank is this ?

What they are saying about no difference between IO or P&I repayments on serviceability is not true.

And I'd be happy to show you the difference in servicsbility.

 

Perhaps they meant you could service either way?