Stupid question about P&I....

Hi there,

I'm an investor who's suddenly realised (yes, late to the party) that I won't necessarily be able to keep refinancing and getting IO extensions.

I have a handful of 2 bedroom units about the 400-500k mark and will have to start paying P&I for the first time on some of them.

When deciding which loans to make P&I, assuming that the rate savings from switching to P&I from IO are all equal, how do you decide which ones to go P&I and which ones to keep IO?

Silly question but do you go P&I on the properties you could be selling in a few years or on the properties you want to hang on to?

Cheers Mason

 

P&I for properties you want to hang on to.

Also consider fixed rates - a number of our clients have chosen to convert their properties to P&I fixed for a few years, as in some scenarios the repayments were only slightly higher than the IO repayments, whilst they are reducing principal and building equity overtime.

For fixing - again, suited to properties you intend to keep, due to break costs involved, should you decide to break the fixed loan term.

 

Hi ladies. Just wondering, and trying to figure out, why do you suggest P&I on these and not the ones you may be looking at selling?

Because if you paid these down long enough, then sold, freeing up that equity, surely you'd end up with cash again to do something with? Or is it much of a muchness and perhaps go P&I on the smallest loans or the biggest pricing gap between P&I and IO?

 

Good point Gockie - that will help control the funds.

Just depends case by case, and hard to really say which way to go for sure unless we have the full picture.

 

It’s usually a strategic thing - P&I for loans that are not able to be extended IO or that have stupid high rates where there’s minimal difference in payments. So much to consider though - you want to be sure that your happy to pay P&I long term as you may not be able to change back if your servicing is stuffed. Also depends where the IO cliff is and how best to manage that. There’s really not a flip answer for the P&I question, it’s really needing specific advice.

 

Don't forget to extend loan terms back to 30 years as this will lower minimum repayments.

 

This is only an option if you can service a new P&I loan. I'm not aware of any lenders that let clients roll off I/O into a new 30 year P&I term.

It's worth checking, but few investors would have enough serviceability to do a new loan P&I but not I/O.

Most will already be stuck.

 

Thanks @Property Twins and @Jess Peletier, yeh pros and cons. If you pay P&I for the properties you want to hang onto then the serviceability for these will gradually improve as you pay off the principal. On the other hand, @Gockie has a point that you could use this equity to free up some cash you get back on any properties you eventually sell. Hmmm, I'm sitting on the fence on this one.

I'm looking at fixing any move to P&I as the rates are good atm. I'm building in the assumption that once I move to P&I I won't be able to move back!

I think I'll move half my loans to P&I and then the other ones will probably automatically become P&I when their IO terms end. (Unless the banks become generous again in 2-3 years but from reading this forum that sounds unlikely and this is the new norm).

 

Can you afford to go P&I on so many loans? Think about your cashflow....

 

Really important to remember that it'll be P&I over the remaining term - so if they're old loans that have had a couple of IO terms already, the hit to cash-flow could be really significant.

 

Can you cry poor and tell (beg) the bank if they don't renew at 30 years, you'll end up defaulting - creating a lose-lose situation??

 

Interesting thought... I'd be inclined to go P&I on the long term holds as once you're done selling, your serviceability will be in better shape having reduced your debt on the remaining properties. Then P&I on as many of the soon-to-be-sold properties as cashflow allows, for the reason you pointed out.

 

Why will it be a lose-lose situation?

Unless you are bankrupt, the bank will get their money. And if you are sailing so close to the wind that your only option is to threaten the bank, you are probably only delaying the inevitable.
Marg

 

Isn't this admission you can't pass a refinance test?

 

How do you calculate/determine the amount that will be principle if and when you go P&I? As an eg, say you had a 30yr loan of 500k @4% int and you had IO for 5 yrs. After the 5 years if you go to P&I is the principal amount per month = 500000 /25 / 12 = $1,666 / month? or is it on a sliding scale as the P reduces?

 

The repayment amount stays the same; the principal portion of which gradually increases over time in concert with interest decreasing.

Repayment amount is given by this formula:

where r = monthly rate (yearly / 12), P = principal, N = loan term in months.

The interest portion at any given time = loan balance * r. Subtract this from the repayment amount to get the principal portion.

 

Maybe the hardship department might consider for an owner occupied loan, can't see it happening for an investment.

 

I have a 500k buffer with cash savings and I think going P&I was going to eat into my savings by being down a net 70k a year, factoring in interest rate rises. If the market goes up then hopefully can get more equity, depending on serviceability.

So that's about 6-7 years before I have to sell a property. Or 6-7 years before I consider switching to a last-resort lender like Pepper!

 

Yeh good point. For some reason two banks for a couple of my old loans gave me a new 30 year term when I refinanced with them to get equity out. That was lucky - so when IO ends I'll only be down to 25 years to pay off P&I rather than 20 years. Not sure if they made a mistake or were just being more generous a couple of years ago!

 

When I refinanced my loans to CBA last year, about half of the splits came with a new 30 year term, and the other half 25 years. All IO at the time. *shrug*