PPOR P/I VS I/O feedback please.

Hello ladies and gentlemen searching for recommendations and feedback please in regards to setting up a new loan for my new PPOR.

Question is do I set the loan up as P/I 3.67% or I/O 4.27% (both options with an offset account).

In the past I have always opted for I/O with offset. That way if/when it’s time to upgrade I am able to move all funds to new purchase and have a fully tax deductible loan again.

However these days you get rewarded with a better interest rate choosing the P/I option whilst paying down your loan.

As you can see I’m very torn and would love any suggestions/ recommendations.

 

You can still do the same thing with a P&I loan. You can still save all your money in an offset account and move it in the same manner when you upgrade. The disadvantage of P&I is one of cash flow and diminishing tax deductions when the property is an IP.

I've done some maths around this. In most scenarios, the tax deductions you miss out on with a P&I loan aren't that substantial, in the order of 0.1% of the loan amount. There are some decent cash flow benefits in the first few years whilst the loan is interest only, but the costs significantly higher in the succeeding years.

Also keep in mind that many lenders are very reluctant to give you an interest only loan on an owner occupied property. The major banks are usually okay with it, but most second tier lenders simply won't do it at all.

 

Hell Rolf,

Will have approximately 65% for what the property owes me including stamp duty ready to put into the offset immediately, thanks.

 

Thanks for all your feedback Peter, this decision has got me so undecided mmmmm....

 

I don't think there's a simple answer to this question that fits everyone. It's very much about individual circumstances and longer term plans.

 

Whats your future intentions?

You could split the loan
a) split A to 65%, or the amount of cash you have on IO = no repayments
b) remainder PI

 

If this is not a long term home, IO may be beneficial. At the same time, keeping IO (and provided your lender allows flexibility to change the structure of the existing loan), there may be some benefit in this - especially if you choose to invest the offset money else where to generate income.