Why dont ppl pay IPs off?

The example i gave was purely to show the benefits of IO for that scenario as they are multiple other scenarios. it purely shows that due to the fact that they had to sell they would have been better off to sell with IO loan as opposed to an PI loan as they did sell at the lost. Even if they did sell and were not divorced they would still be in the loss of that 36K.

Whether they had other IPs positive or negative geared, lost their jobs, sell their portfolio or were on a million dollar salary or had lots of income is not relevant because on that PI loan alone they lost money and could have been 36K up if they did IO.

 

Yes, and I was agreeing with you but also saying that there are many, many more examples of people getting caught out and losing financially due to stretching beyond their means, having spent their buffer on more deposits.

 

OK as a discipline factor to put money into the loan as oppose to going above their means and borrowing then yes - that would be the only reason i can think of for P&I

 

The size of the property portfolio would also be another factor. It's easy to pay P+I if you only have a couple of IP's. However, if you had multiple IPs like many of the posters here do, than it becomes a lot harder to pay P+I unless you have a low LVR with positively geared properties. It would also make it easier for taxation purposes.

 

Well since everyone so far advocating IOhas said that they can use the money for something else it seemed relevant. It's fine when the market is going well, or you can exit when needed etc etc but I'm just saying it's not always like that, is it?

 

Since i started investing i have for the most part not paid off much principal (besides ppor) on all my deals, and i dont view it as high risk or view myself as a 'pure speculator'. It has allowed me much greater ability to grow my asset base and build my net worth much faster. It is only higher risk if you hold a long term bearish view of the Australian property market.

Just my opinion.

 

I imagine that - like me - there are investors with a variety of loans. As already stated, I want to reduce the amount of interest I pay. I have a couple of IO and a couple of P& I. And I'm disciplined and good with money.
I like having the offset and love to watch my debts going down. I think that investors are more likely to get further loans if they are seen to pay down their debts. I want to get rid of as much debt as I can while I'm healthy and strong.
TBH I think the IO thing is good but exagerated because a few years ago brokers could encourage an investor to buy more. Not now. However, it's still the case that you can get 5 x your equity I believe. I also think that there would be quite a few paying P&I and not saying because they may be branded as undisciplined or unsophisticated.

 

It's when interest rates rise that people with a lot of debt find themselves in a pickle. I've seen it and it's painful to watch. People who take on a lot of debt are fine as long as interest rates stay low. It's the luck of the draw or being able to choose when to sell something before the **** hits the fan.

 

Makes sense if you're trading, not much point in P&I for that strategy I wouldn't have thought.

 

i would presume if times gets harder say for e.g. someone lost a job and required the funds to support his family for e.g.- would it not be easier to get the extra funds in offset as oppose to refinancing being the funds has gone into loan as a PI? i never used PI before and the friends and relatives i know who have used that and subsequently sold ther propert linked to PI loan have always been worst off in terms of lost of funds due the principal payment component. Besides the discipline factor for someone who may make a wrong purchase or overgear - can't see any other benefits of PI - do you have any?

 

I am with ANZ, had 2 months left on the IO on the PPOR.

Walked into the bank within 5 minutes it was extended for another 5 years.

Most banks will extend for another 5 years but they make it difficult to do it again after 10 years.

However just switch banks and start again if they don't extend for the 10-15th years.

 

if you're trading property as in flipping - you normaly buy in cash to limit any repayments etc and to speculate the growth with the minimum possible outlay. people who normally do IO are looking to expand their portfolio or looking to use the extra funds to purchase other deals that would return them higher return as to paying the extra capital repayments

 

HI @ellejay i'm not exactly sure what you mean...

 

But everyone is stating that the benefit of IO is that you can use the money in the offset for further deposits, so you can't access it if you've used it to buy another IP or something. Of course, if you leave the money in the offset saving interest that's different-but then it would be same as P&I. I agree that if it's a short term purchase then P&I wouldn't make sense.

 

Yes this makes sense to me and is my approach.

 

Perhaps it matters what phase you are in. If you're in the growth phase and you are reasonably aggressive, IO makes sense. Allows you to expand your footprint. Obviously comes with risk, like anything. Interest rate rises being probably the most significant. If your portfolio is at peak in respect to growth, then perhaps PI makes more sense. Start reducing debt and realising the cashflow. Over the longer term, rents would have risen and thus be sufficient to cover the PI repayment and provide heathy +ve cashflow.

Just my thought....

 

I do P&I on all my inv loan and PPOR loan.

Reason being is because if I am to sell my Inv property, I will gain access to those funds/equities that I paid off earlier, however, if the market dip, I know for sure that I have less financial burden as I've been reducing my principle amount which turns into less interest payment regardless of interest %.

being I/O loan is good for short term cash flow, if you never pay down your principle, when interest rise you will start to pay more interest, which will hurt your once proud cash flow.

However, If you have been paying P&I, even when interest rise, because you now owe a smaller principal debt, your repayments will be likely remain the same or lower, you can achieve this via a re-calculate of your re-payment. or what the bank call an internal refinance.

 

@ellejay
If this helps you understand the power of IO compared to P&I.

Lets pretend you bought a house 10 years ago for 250k now worth 500k and you were able to pay it off in 10 years.

P&I
Year 1 - House 250k (Loan 200k/80LVR).
Year 10 - House 500k no loan
Money after 10 years = $500,000

IO
Year 1 - House 250k (Loan 200k/80LVR)
Year 10 - House 500k (200k Loan but 200k in offset).
Money after 10 years = $500,000

So both are in the exact same situation no real benefit.

However lets say you want to go purchase another house at 500k, you have to apply to the bank to draw the equity against your property if P&I. On the IO with the offset you simply take out $100k as the deposit and ask the bank for another 400k loan (less paperwork).

Lets say after 10 years your car broke down and you wanted to buy a $50,000 car but you had no cash.

Here are some ways of paying for the car;
Worst way - Go to the car yard and buy through their finance at 10% p.a

Okay way - P&I go an apply to the bank to draw $50,000 in equity against the house to pay for the car and pay 5% interest and pay the fees to withdraw the money (lets say $500 and about 2 weeks to get the money). Once the funds have been cleared then go to the car yard and buy a car. This involves paperwork before you have bought the car.

Best way - IO - walk into the car yard, pick your car and drive it away without talking to the bank or paperwork (besides the car sale contract) and paying 5% interest on the $50,000.


Flexibility and freedom is what IO gives you but can end up costing you more if not respected.

 

You know you could do the exact same thing with an offset but have access to the funds at anytime rather than just selling. Even if you do sell you will still get the money out of the offset.

If your offset is full e.g. 400k loan with 400k in offset you do not pay any interest.

 

It is a personal choice, but most investors in accumulation mode choose to pay IO (interest only) and not pay any of the loan off.
Example (assuming a doubling in value every 10 years):
Year 0: Loan $400K Val $450K Equity $50K
Year 10: $400K, $900K, $500K
Year 20: $400K, $1.8M, $1.4M
So you have nearly $1.5M of equity and the same unpaid off $400K loan - who cares?
Think long term.