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Why dont ppl pay IPs off?

Discussion in 'General Property Chat' started by property world, 27th Jan, 2016.

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  1. property world

    property world Well-Known Member

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    Ive spoken to a few on here and a few in real life that own IPs and those people keep telling me just pay IO and dont bother about paying them off or reducing the loan amount.

    Why is this.

    Whats the theory and logic behind this.

    To pay IPs off vs Not to pay them off ?

    Thanks
    Pw
     
  2. D.T.

    D.T. Adelaide Property Manager Business Member

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    It's a waste of money.

    If you pay 2500 a month p&i vs me paying 1600 a month io for the same value property, I have 900 a month more than you which I can spend as I like (or further my portfolio along with).

    Additionally out of your 2500 per month, only a portion of that is tax deductible whereas my 1600 is 100% deductible.
     
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  3. larrylarry

    larrylarry Well-Known Member

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  4. melbournian

    melbournian Well-Known Member

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    i have never taken an principal and interest loan before. just IO and offset to manage the funds. I currently have my PPOR in interest only with the whole amount in offset. you don't necessarily have to put it in offset you can also put it in withdraw - just enables easy access to funds.
     
  5. property world

    property world Well-Known Member

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    But isnt that 2500. 900 of that is reducing the loan every month. So the rent returns become greater whereas yours stays the same

    Pw
     
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  6. Shahin_Afarin

    Shahin_Afarin Residential and Commercial Broker Business Member

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    Horses for courses.

    We have investor clients that are terrible with saving and are simply not disciplined with their money and thats completely normal.

    Then there are clients that are extremely disciplined with their money and saving funds in an offset allows them with more liquid funds to use for future investment purchase, whether it be shares, property, etc.
     
  7. jaybean

    jaybean Well-Known Member

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    You are confusing things. They do want to pay them off, but just in a way that allows you easy access to money.

    Imagine this simplified scenario:

    Interest = $1,000p/m
    Principle = $1,000p/m

    You have two options:

    1) Pay $2,000 P&I
    2) Pay $1,000 in interest, then put $1,000 into an offset account

    Interest charged on #2 would be identical as #1 because in total, $2,000 has been deposited.

    The difference is someone that goes with #2 will find it much easier to get access to that capital should he / she need it. Liquidity is the key. It's not hard to devise of a plan to get rich. Any fool can do it. It's finding strategies to stay afloat between now and then is what will set a good and bad investor apart. Having access to lots of cold hard cash will help you do just that.
     
    Last edited: 27th Jan, 2016
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  8. SaberX

    SaberX Well-Known Member

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    +1 to jaybean above, that's my thoughts on why i'm going IO. Won't work if you don't put the difference into an offset or use it for another asset purchase (shares, property etc) and put it to work.
     
  9. See Change

    See Change Timing Lord Premium Member

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    I pay loans off , but I do it when I sell properties .

    IO gives more cash flow to buy other properties . Once they go up in value ( assuming I got my timing correct ) I sell some , pay CGT , and then pay others down .

    Cliff
     
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  10. MTR

    MTR Well-Known Member Premium Member

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    Perhaps I am wrong but banks have policies in place now where the loans revert to P&I after 5 years
     
  11. larrylarry

    larrylarry Well-Known Member

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    And change lender for IO.
     
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  12. melbournian

    melbournian Well-Known Member

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    Yes they were going to revery to P&I but i just renewed mine with bankwest for another 5 years last year. it was a loan that was transferred from another property i sold couple years ago so it had the home loan portability option. i was given a low rate by RAMS and NAB but was just too lazy to move as was not paying any interest and all my accounts debits and credits were linked to bankwest. RAMS even do IO for like 7 years.
     
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  13. ellejay

    ellejay Well-Known Member

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    So having "easy access to the money" means they can take it out and spend it on something else, which is the whole problem. I don't have an issue with IO loans but to say P&I is a waste of money is something you might hear from someone who hasn't yet experienced a dip in values and negative equity. It also doesn't account for the fact that people have different spending habits, or may be at different points in their investing journey, or many other variables.

    It's good to be confident in investing and keep pushing yourself forward. Have some realism though, property doesn't always increase in value,, so P&I provides equity regardless of what the market does in the long term. People will talk about lost opportunity due to paying higher repayments under P&I. I'd personally prefer my portfolio to have a strong financial foundation with tenants paying the principle over a few extra properties that I can't actually afford, whilst speculating on the next boom. There are many ways to achieve success though, so each to his own.
     
    Last edited: 27th Jan, 2016
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  14. HUGH72

    HUGH72 Well-Known Member

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    We use mostly IO loans with offsets but I also like to have 1 P&I loan which we use for forced savings and debt reduction as we don't have any ppor debt. If we move one day it will most likely be into one of our ips.
    Although its not the most the efficient method I like paying down a little debt to increase equity and cashflow. I'm not willing to stretch our cashflow to the max and like to maintain a fairly low LVR.
     
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  15. melbournian

    melbournian Well-Known Member

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    i put this scenario to you which has happenned to couple of friends (both got married and divorced) Got married Bought a nice house 575K paid P&I for 4 years and eventually divorced and sold the property.

    Assuming a rate of 4.75% the figures paid would be differnece of around 765 per month btw P&I and IO which would be around 36K in 4 years. it would be more disadvantageous to you to be P&I. the saying goes never say never that you owuld never sell as anyones circumstances can change due to relationship changes, medical etc. And you can't claim principal on tax - so you are basically riding off your potential CG. it is better to manage the extra principal in offset or withdraw.
     
  16. Leo2413

    Leo2413 Well-Known Member Premium Member

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    Why dont ppl pay IPS off?



    I prefer to use the extra money to reinvest in deals that will yield me a higher return than the interest cost I pay. I let the tenants foot the bill for most of it in the meantime.

    All depends how aggressive/ambitious you are and on your risk profile and goals.

    Just my opinion.
     
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  17. JacM

    JacM VIC Buyer's Agent Business Member

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    Hi @property world

    Try to think of money in the offset account as follows:
    Principal funds that you have paid off and thus help push the mortgage interest charged down. However it is also money you can withdraw when you like without asking permission.

    With a redraw you must ask permission and pay a fee.

    With an equity release you must go through a full finance application (and pay fees) and you may be rejected. Certainly if your financial circumstances have changed and/or bank lending policy has changed. So you might be sitting on heaps of equity because you've paid a lot off the loan, but be physically cashflow poor and not be able to buy your weekly groceries.

    Quite a simplified explanation, but I hope that helps. :)
     
  18. wogitalia

    wogitalia Well-Known Member

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    The majority who would advocate not paying down a loan (be it though an offset or P&I) are the pure speculators. They hold the property on a short term basis with the intention to sell it in the near future for a profit and to take that money and move onto the next target. It's a high risk strategy.

    Most people would advocate paying it down via an offset for flexibility and access to funds, really the only reason to use a P&I now is if you know you lack financial discipline and need that forced structure.

    It basically is a strategy thing, anyone with a long term perspective should be actively trying to reduce interest paid, it's dead money that gets you nothing. Of course you should be attempting to maintain the flexibility to take any opportunity that presents a greater return than not paying the interest at 4.5-5% p.a in the meantime though.
     
  19. ellejay

    ellejay Well-Known Member

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    And what if they hadn't got divorced and had to sell, what if they (already) had sufficient ips to reach their goals, what if the property didn't increase much in value over the years of ownership but paying down some of the debt meant they could work less and have more freedom. I hear what you say but your friends' experiences aren't entirely representative. Are you aware of examples of any investors who had to sell up their portfolios, and go bankrupt due to the market rather than divorce? As I said, not against IO but there is another side to the story.
     
  20. See Change

    See Change Timing Lord Premium Member

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    Up to know we've always been able to roll over for another 5 years or we've sold before we get to it .

    Cliff
     
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