Why dont ppl pay IPs off?

Well purchasing IP by cash is a totally different story here, I wish I have this ability too lol

 

I'm sorry but your scenario makes no sense. Paying P&I hasn't increased the loss by a thing. If they hadn't paid down that portion of the loan they simply would have owed more to the bank at the time they sold it. If it was sitting in an offset instead they'd have paid the same interest regardless (otherwise they also saved interest and are actually ahead).

Think about it... if you have a 500k mortgage and you pay down 36k of principal over 4 years you have a mortgage of $464k, so if you then sell at 450k you'd need another 14k to payout the mortgage. If you don't pay that principal and instead sit it in your offset, when you sell for $450k you owe 500k on the mortgage still, so you need 50k to pay it off.

 

We're all different - risk profiles, circumstances, age, goals, mouths to feed.

I'm investing in property to create wealth, not pay down debt. I use I/O to:

1. Increase my buffers
2. Have more options
3. Aquire more assets
4. Create more wealth

 

No way. They bloody take that much to just enter your name on their system.

 

Agree on all 4 counts.

You, my friend, are (apparently) a pure speculator now

 

Good question to ask.

IO loans relies on the property prices going up. It can be good (save money + tax deductions + buy more properties) and it can also be dangerous. You can get loaded up with too much debt, or if the property market drops and you don't have a decent cash buffer, you can get into trouble, or owe more money on your property than what its worth.

APRA and ASIC have started clamping down on the banks lending practices, especially in the IO loan department. They have good reasons for doing this.

You have to be careful who you ask about IO loans. My understanding is that there are more commissions and profits for banks and brokers in the long run with these interest only loans. So of course they will promote it and tell you to get interest only loans rather than paying down your debts.

Have been filming for a segment on TV and the guys are speaking to someone who is shorting the housing market. They are of the belief that Australia is in a big debt bubble and there are problems looming ahead. Will find out more tomorrow, will be interested to see the reasoning and research behind this persons opinions. According to this source, interest only loans in Australia are the US's version of subprime mortgage lending which as we all know went belly up in the GFC.

 

And, if the property was an IP, then the 5% interest on the $50,000 to buy your car is tax deductible (as long as the Offset only contained personal funds, not any loan monies). You can't do that with a redraw on P&I loan on an IP.

 

I believe you cannot claim the car loan as tax deductibles as it is considered personal leisure unless it is for biz use?

 

I'd say if your chosen IP can't at least do that, then why bother? It is only an average of 7.2% growth pa. Throw in a couple of 20% growth years (as we've just had in Sydney) and you can afford a couple of flat years too. After all it is a wealth creation strategy not a let's collect a lot of pretty houses strategy

 

It is not a car loan. The IO loan with an Offset was used to buy the IP and you have put your hard earned money into the Offset. If you take $50,000 out of your Offset (your money), then the interest on the $50,000 is tax deductible.

 

Got ya!

 

Sometimes i think people want to create wealth via real estate with no risks along the way.

Just remember folks, 80% of businesses go bankrupt in the first 5 years, wiping people out. I doubt 80% of people who invest in property go bankrupt in 5 years.

Risk needs to be put into perspective.

Just my opinion.

 

Can you find out how they will short the housing market? I too would like to do that.

 

I won't say that IO loans with Offsets are for everyone but I am a big believer in them (for me, I wouldn't use P&I). I have a number of IO loans with Offsets, all used for investments, mainly to buy IPs and businesses.

Some of these Offsets are chock full with hard earned money. I can withdraw some or all this Offset money and use it however I like:- go to the Casino, go on a holiday, buy a car, buy another property (IP or PPOR), etc. In all cases, the interest would be tax deductible. That is why some (many?) investors like them.

I have had a bank who wouldn't let me rollover my IO loan for another 5 years. I told them I would take my business elsewhere. They still wouldn't do it. So, I took my loan and chock full Offset elsewhere.

 

Are you sure that's what they were implying? I can't imagine anyone with the facts suggesting that unless it's solely to stir up attention to sell a book or seminar, rather than represent their actual views.

 

For clarity I think respondents need to state whether they are talking IO with an offset as a buffer/safeguard or simply IO at high LVR's.....

The offset makes a big difference when presenting the pros and cons of IO vs P&I, especially to new investors who may take some of these posts as "financial advice".

 

I pay off a chunk of debt now and again when able and have no problem borrowing more. The bank doesn't ask me to sell.

Exactly, and just to clarify, there are millionaire property investors out there who primarily use P&I, so it is very possible.

 

At the end of the day - as many have touched on already - IO vs P&I is really a personal decision.

There are clear benefits to utilizing IO, but if those benefits are cancelled out by poor financial management, a lack of understanding of the best way to structure arrangements or a range of various other pitfalls then there really is no point.

If someone isn't good at budgeting or lacks financial discipline (which lets be honest, is most of the population) then I would never recommend they use IO. P&I is much simpler and easy to understand for most people.

To more specifically address the OP; there are a range of reasons why people don't pay down loans on IPs. All of these reasons pretty much boil down to the same fundamental though: flexibility.

Flexibility to access cash (pull funds out of offsets for any reason you like, without risking tainting the original loan for tax purposes), flexibility to perhaps use funds that would have been paid onto the loan principal for other purposes, etc.

 

Yes That's what they are implying. I'll know more tomorrow.

 

I don't agree. Years ago I bought a block of units. I took out two IO loans with Offsets totalling around an LVR of 106%. One loan was 80% against the block of units; the other 26% was against another property. The 26% Offset is now chock full, the 80% Offset is filling up. Total LVR is now about 50%. In time, the 80% Offset will be chock full and my LVR will be in effect 0%. At any time, I can withdraw some or all the funds in the Offset to do as I like. You can't do that with P&I loans. That is called flexibility (which you can never have too much of). There is no way I would use P&I for the above example. it makes no difference if my original LVR was 106%, 80%, 50%, ...

I can't think of a good reason for me to use P&I. If the market crashes, I can use the funds in my Offsets to keep the bank at bay. If the market crashes 50% tonight, I would be at LVR of 100% if the banks did a revaluation. Not the end of the world for me but a market crash of 50% might cause some others some issues.

Some say you need to be disciplined to use IO with Offsets. I would say you need to be disciplined to get into any sort of investing. If you are NOT disciplined, don't invest, go to the pub, casino, etc. Better place to spend your money as least you will enjoy it .

The above is NOT financial advice, it is my humble opinion (which ain't that humble).