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What is the goal when getting a interest only loan?

Discussion in 'Property Finance' started by Darlinghurst Boy, 3rd Aug, 2015.

  1. Darlinghurst Boy

    Darlinghurst Boy Well-Known Member

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    Why do you get interest only loans? Is it mainly for Capital Gain ?
     
  2. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

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    There could be a number of factors why.

    The most common is usually due to the borrower having non deductible debt elsewhere - such as a PPOR loan. If there's any debt you should get rid of first - it's the non deductible stuff.

    It can assist with future borrowing capacity too - the minimum repayments on IO terms are less than P&I.

    Cheers

    Jamie
     
    Last edited: 3rd Aug, 2015
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  3. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    It's about flexibility. When you pay P&I, and redraw from the loan the redraw is classed as new borrowing for tax purposes. This can result in the loss of thousands of dollars of tax deductions in some situations, where if you paid IO and put the principle in an offset, that's completely avoided.

    Also, it maintains you borrowing toward the end of the loan. For eg, you've completely offset your loan, and have recently retired. If you want to borrow at this stage, it's difficult, where if you've got access to that cash in your offset no further borrowing is required.
     
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  4. D.T.

    D.T. Adelaide Property Manager Business Member

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    To reduce holding cost of each property - therefore hold more properties. The wider the asset base the more benefit can be achieved when the capital growth wave comes.
     
  5. jaybean

    jaybean Well-Known Member

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    Two primary goals. First it frees up precious capital.

    Secondly it allows you to leverage the power of inflation. 100k would have been a big loan in the early 90's but now you'd laugh at it. Likewise a million know will look like a joke 30 years from now. So you pay interest only and 10-20-30 years from now you can sell and pocket the CG, or decide to keep it by throwing some pocket change at it.
     
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  6. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    The benefits of IO combined with a 100% offset are
    - You can not tying up capital
    - lower cashflow so you can invest more
    - divert funds for private expenses but be able to claim the interest
    - Keeps larger reverses for emergencies
    - Builds up a large sum which can allow earlier retirement or mini retirements
    - Allows you to buy more property when you can no longer borrow
    etc

    AND it doesn't cost you any more in interest - unless you are a spender and spend money you otherwise wouldn't if you were paying a loan down.
     
  7. DanW

    DanW Well-Known Member

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    For us it's all about reducing risk, among other reasons.
     
  8. citystar

    citystar Well-Known Member

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    I lock all of my loans as Interest Only for the following reasons:

    Increase cash flow which is kept in my 100% offset account;
    Preserve the Principal Loan to maximise future deductions;
    My PPOR is IO in the event I move out in the future and it becomes an investment property.
     
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  9. Darlinghurst Boy

    Darlinghurst Boy Well-Known Member

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    But dont you want to get out of debt? Even your own home is interest only?
     
  10. D.T.

    D.T. Adelaide Property Manager Business Member

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    Pay it off using fast money not slow money.
     
  11. MichaelW

    MichaelW Well-Known Member

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    Servicibility and Flexibility...

    Servicibility: Maximises your borrowing power from a DSR perspective as you minimise your cash flow commitment to any individual loan.
    Flexibility: Maximises your flexibility as others have said by not paying down principal thereby retaining the mobility of your cash.

    Cheers,
    Michael
     
  12. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    If you had $500,000 owing and $500,000 cash in an offset you would still have huge debt, but would incur no interest.

    Imagine if you paid off the loan and then lost your job - you could not borrow any more money. But if you had the IO with offset account you could still have $500k left to cover living expenses for the next 10 years - and the interest would be deductible.
     
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  13. Set81

    Set81 Active Member Premium Member

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    I currently have two IP s and live with my parents , both the loans are P&I , I also have a personal loan I owe $7k on I am ahead in repayments by about $10k , I am going to redraw on this a few grand for a holiday in October , would it be best to change my loans to IO with off set accounts and put the excess onto my personal loan instead of into the offset ?
     
  14. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    If you redraw you will be creating a mixed loan = don't do it if the interest is deductible!.

    I would try to change to IO and set up an offset. Perhaps keep paying off the personal loan though - unless this relates to the investment and the rate is low.
     
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  15. citystar

    citystar Well-Known Member

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    It isn't paying down the loan however I am in effect reducing the loan interest payable by keeping my money in my offset account which I have control over. If I paid the money into the loan account the bank now has control and if/when I turn the PPOR into an investment property the tax deductions will be reduced.

    I am happy to stay in debt as long as the asset, my properties, are increasing in value over time. In regards to my PPOR, based on research from Pricefinder and observing the market, the property has seen capital growth and an increase in value from a renovation. Even though the debt isn't being paid down due to IO, if I sold it today the sale price would pay off the loan and put a nice after tax profit in my pocket.

    There is no right or wrong way to play this game. I know many successful investors who pay down their loans as quickly as possible and avoid IO and this strategy works very well for them.
     
  16. Set81

    Set81 Active Member Premium Member

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    Hi

    Thanks for that info , my personal loan is a car loan it has nothing to do with property purchases , so it's best to go interest only and pay off that personal loan as its non-deductable I think .

    How in the end wouldn't you pay more interest if you kept it in IO for a long period though ?

     
  17. poeter

    poeter Active Member

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    No extra interest is paid when the funds which would had been going towards paying down the principal is parked into the offset account.
     
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  18. Set81

    Set81 Active Member Premium Member

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    Ok so in my case where I've changed to IO there will be some extra interest because I'll be using the principle money to pay my personal loan out ..

    I always thought you put the money you would have in a offset towards a future deposit when there's enough , so if you took the money out of the offset your interest would go back up wouldn't it ?

    Also a guy I was talking to said the more interest I pay the better , he said putting it in a offset would defeat that purpose .
    He said he pays interest only then puts those extra funds into term deposits which in the future he will pay his loans out .

    Thanks for help
     
  19. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    That guy doesnt understand the basics. He is borrowing at 4.5% and investing at 3%.
     
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  20. D.T.

    D.T. Adelaide Property Manager Business Member

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    And in the process getting a 1.5% tax deduction! It's genius
     
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