Should I get an interest only loan?

Hi,

First time poster and potential first home owner. I’m planning on buying a property to live in. From what I’ve read the benefits of interest only loans come from being able to deduct interest expenses especially in the case one decides to purchase a second property and rent the first property out. However I have no intentions of ever buying a second property.

I don’t intend to live in this property forever but in the future I will move out and rent somewhere else or live overseas and lease out my property. Even if I move out I don't see how I will be able to get a tax advantage from going with a IO loan. Can someone explain?

Also I'm aware there are liquidity advantages of having your cash in an offset account vs. paid into a mortgage.

Is there anything else I should take into consideration?

Thanks

 

take into account also
-rate
- serviceability

 

If you have no intentions of ever buying a second property, I'd suggest principal & interest payments would be the way to go. The only reason you wouldn't is if you have something else to save the better interest only cash flow for.

 

If can afford P+I then do and P+I, if you can't afford P+I and take on IO you probably can't afford to buy a property at this stage.
also consider adding 2% on top of the current rate see if you can afford it

Lot of cost owning a property, rate, repair, maintainance, emergency stuff like dead hot water,
clog drain, broken roof tile etc...

IO only benefit if you have a PPOR and investment properties else paid your minimum P+I repayment and throw them all in the offset account.

 

Some institutes are no longer financing with IO loans for residential home that you will reside in.
You may want to check with your bank.
The option for IO loans for investment properties are still on the table but has become tighter.

 

I agree that if possible (and assuming you have no other plans) that you should be paying principal, but unless there is a very different interest rate on a P&I vs. IO then I don't see why you would go P&I over IO with an offset.

Provided you are disciplined, the net effect is exactly the same provided you pay whatever principal payments you would have into the loan, into the offset instead. As you have already identified, the liquidity advantages are there and more importantly, given you've said you want to move out and turn your PPoR into an IP, if you use the offset balance for any purpose, you will not be penalised on a tax basis for using that money - particularly if your plans change and you do buy a second property or need the money for other non-deductible reasons. You will be able to draw the offset funds, effectively increasing your debt on what will turn into a tax deductible loan and not go upside down on your finance (where you have a small deductible debt but a large non-deductible debt). You cannot do this if the funds were sitting in redraw from the mortgage itself and you use the funds for a non-deductible purpose.

I will shortly be doing this myself - buying a PPoR and I have a larger than 20% deposit (but I'll be using 20% simply to avoid LMI) and putting the rest of the funds into offset. Depending on the loan amount, this can actually be beneficial as you'll usually get a better rate for higher loan amounts but then cheat the system but effectively decreasing that loan amount with offset funds after the fact.

Once again, the interest rates must be the same (or at least very close) and you must be disciplined.

 

I like interest only. Maximise tax benefits. And you can always choose to pay off parts if you wish.

 

There is no tax advantage, the only advantage is cash flow & that is mainly important when buying more than one place.

There can be an advantage once you have more than one place and you have non deductible debt.

 

There are plenty of tax advantages with IO loans!

a) allows a borrower to increase deductions while paying off non-deductible debt first.

b) maintains a high loan balance, but saving interest with the offset account, so that when moving out of a main residence there will be more deductibility of interest

c) allows for tax effective retirement or even pre-retirement. When you withdraw money from an offset the interest on the loan is deductible even if you use the money for a private expense. When you pay down a loan and redraw the interest won't be deductible for private expenses.

etc

 

Well, yes it can if you have non deductible, I put that in the post.

But, at th e end of the day, you know as well as I do that most people use it to never pay off loans & that is what the govt is cracking down on, you cannot have ever growing debt that is never paid off & offset that does have cash is for use elsewhere at some point.

 

The original poster stated that they'll move overseas and are unlikely to ever own another property in Australia. The tax advantages of an interest only loan are far outweighed by paying off the loan.

For more general terms, we're getting to the point where there's more benefit in an P&I loans:
* Lower interest rates
* More favourable lending conditions
* Better serviceability for future purchases

There are still significant benefits in I/O loans but the argument either way needs to be kept in context of the individuals plans and circumstances.

 

I am not saying you can. But some people can use IO loans effectively in some situations. Not everyone has reached their servicing limits and/or wants to keep borrowing,.

 

I also think it is a poor assumption that so many are disciplined, or even fully understand what they are doing.

Also if you have any desire to have investments that pay you cash, lowering debt and gaining taxable income has to be the goal, along with clear signals that lowering of debt is going to be better that ever increasing (although the latter is unavoidable if actively growing).

They also do not seem to be a sophisticated investor, albeit good to learn about these things to make right decision for the individual.

 

Sometimes I wonder about you dabbler!

 

I think the key & the govt also thinks this way now, that it is only *some* and encouraging the public at large, who then I suspect mis use, has become a problem, which in turn stuffs up people who want to expand still.

 

Why, because I encourage people to pay things off and contribute to the tax base ?

 

And because I think it is a better end goal to get cash income from IPs ?

 

Correct, but the reality is that plans change and if they do, he/she will want to be in the best position to have flexibility without penalty. Two out of your 3 points there aren't relevant if the poster decides not to purchase again anyway, and the interest rate itself is already identified as one potential benefit for P&I. I don't believe it outweighs the advantages of "paying off the loan" into the offset for potential future flexibility which can still be accomplished.

As you've identified, it's an individual assessment. If we concede that the posters plans will absolutely not change in the future then I see no reason not to have a P&I loan. However, my experience tells me that the best laid plans...etc. etc.

 

What he said ...

 

Sure. If you like higher interest rates, then please post here as such.

The banks will be falling all over themselves to do business with you.