Why dont ppl pay IPs off?

It's for the big end of town. The billionaire boys do it directly with the banks.

Watch the movie - the big short

 

Are you sure you don't agree? IO with a loaded offset is a very good way to play.

The point of my post was that respondents are not being clear about how they are advocating the use of IO. Loading up the offset account or speculating on CG alone.

 

If someone lacks financial discipline, then they will run into problems regardless of whether it is IO or P&I. And I wouldn't want to see them investing in property regardless. Even with P&I, they will still need a buffer to take care of expenses. If they can't control themselves and leave it alone, then they have no business being in the game in the first place.

 

Lol that is not humble at all, you need to understand the average populations don't have the ability like yourself to pump in such large sum of cash into offset account to fully utilise it, it is no brainer that with a fully loaded offset account even when banks are charging 15% interest will not affact you because you are not paying any interest at all. But in fact average investors load themselves up with debt in the hope of one day achieving financial freedom, while offset is good, they also need to monitor their debt exposure to prepare for stormy days such as bank raising interest and their IP not being rented plus lost of primary income.

 

@kierank I like your posts. You view property investing completely from a non-emotional, business perspective which makes sense to me.

 

A major benefit of IO IP loans is any money that would otherwise have gone to paying down deductible debt can go to an offset loan on your PPOR saving you non deductible debt.

If there is a crash or even a correction that presents in your opinion a buying opportunity, whilst people on P&I may be unable to access equity (due to a reduction in value) if you have cash in offset this can be used. When market recovers you are better off over having just ridding the market out with original properties.

 

Or perhaps the people who have been paying P&I may be able to access equity to continue buying (as I am currently doing, as opposed to some here on IO who are unable to buy currently) because the banks see that they have been paying off debt. Or perhaps they will use the cashflow that they have generated from paying off debt. Is it me, or do some people just completely refuse to accept that IO is not the only way to become financially free? I have no problem with it, but it only works in the ways described above if you have other good habits and/or good luck. It's not a magic bullet on its own.

 

You don't know me, I am very humble .

The 'large sum of cash into offset account' didn't get there overnight. I have been investing for nearly 35 years (both in business and in property), taking lots of calculated risks, working bloody hard, doing without, made lots of mistakes (one nearly caused me to lose my PPOR, another could have sent me broke if I didn't take rapid and severe corrective action), building my property portfolio, putting money into smsf, etc.

I wish we had IO loans with Offset accounts when I started investing. It would have made life so much easier. Read my Intro post. For the second property we purchased, we had a 60% deposit and the banks would only lend us 20% and as a personal loan (the other 20% I borrowed from my parents with a loan agreement and paid interest). Still was a no brainer for me!!!

Of course, one has to monitor debt exposure to prepare for stormy days such as bank raising interest and their IP not being rented plus lost of primary income. That has always been the case and I was an investor when interest rate hit 17%.

It is a lot easier today. One way is to use IO loans with Offsets.

 

The thing is, it's a choice. Humble or not (everyone), there's really no need to insist that someone else choose a particular option. The real point is whether or not the loans are paid off. If the offset is chokas then it's as good as paid off for now.
If you don't like paying interest ad infinitum, you can choose P&I or IO with offset or both. Just be aware that there can be ulterior motives, then let it go and make a choice that suits you.
The other thing is, if you try it and don't like it, you can change it later. I tried IO to start with and didn't like it because there wasn't an offset and the interest rates were higher. I changed back to P&I and felt great.
Now I've got a couple of IO with offset and I love them because the interest rates are very low and I have extra to put in (and take out for renos).

 

Now with a bit of your background info i totally understand where you are coming from, but the point i'm trying to make is that paying off debt is always a good way to prepare for unforeseen financial hardships, and instead of when that time comes and force to sell, better off start reducing that debt and if you are in a strong financial position, refinance it, at least that way you are in a totally debt controlled territory.

However, my full respect to how you came a long way. I'll take that comment back

 

Don't believe I ever mentioned magic bullets or that it was the only way. Think I used the words a major benefit...

 

You said that people paying P&I wouldn't be able to access equity compared to those paying IO but I think you know it's not that straightforward, which was my point. Plenty of people are maxed out on IO, as demonstrated by some posts here, and cannot buy, compared to others with P&I who have a good rating with their banks. Depends on individual circumstances as stated over and over again. Anyway, as I keep saying, each to their own, just irritates me when people keep making out that IO is the only way to generate real wealth.

 

Again you misquote me I said "may" not be able to access their equity. Let me give you an exaggerated example of what I was getting at:

Investor A & B buy identical house same street same price $100k at 80% LVR both pay the same total repayments for a period of time (CBF working out the time) which results in paying $20k more than interest.

Investor A is on IO his $20k is in offset.
Investor B is on P&I his $20k is locked in equity.

Now let's say the market ***** itself and rather than going up decreases 20% from original investment price.

Investor A can acces his $20k in offset without re-fi and although this would effectively leave the original investment at 100%LVR

Investor B would never t be able to refi (without paying LMI) as his property would now be sitting at 80%LVR thanks to the $20k of principle repayment being locked in.


Now please note nowhere in the above do I say this makes it the only way to invest in property. Or the only way to generate wealth.

Just stating one of the benefits to investing in this manner.

The past 20 years have rewarded the aggressive investor, this does not mean the next 20 will.

Low LVR and P&I are less aggressive ways of investing. Does not make the wrong. In my mind the investing bit is the important bit. Doing it in a manner that you feel comfortable is more important than making the most wealth the quickest.

I hope this makes my opinion more clear for you.

 

Actually not really, when you purchase your next property the bank will look at your total loan exposure.

If you got that 20% locked in principle, while applying for a loan, you can increase your IP1 loan to make up for the deposit amount for IP2, this work exactly the same way as IP1 being I/O and taking out the 20% cash in offset to purchase IP2. At the end your total exposure will still be the same, and if you cannot service the new purchase no matter you are on P&I or I/O you still cannot change the outcome.

To borrow more you really need more servicing power and that is to have more income to support, and when income doesn't generate quick enough, start paying down debt.

 

I couldn't agree more.

Some people do this with P&I loans and go back to the banks requesting money (eg the banks are in control) if/when they need it for investing. You can use this money for private purposes if it is a separate loan but the interest on this new money is not tax deductible.

Others like me prefer IO with Offsets and just withdraw money from our Offsets without even having to go to the banks (eg we are in control) if/when we need money, for investing or private purposes. The interest is always tax deductible (assuming you haven't polluted your loan or offset).

It is a bit like blondes and brunettes - they are both nice, but some prefer blonds and others brunettes

 

@Caltan Why give an exaggerated example in favour of your argument? Most of those who responded to this post intimated that the money saved would not be left in the offset but used 'flexibly' for other investment deposits. So it wouldn't be there when, as you say the market xxxxs itself. The money reinvested would be impacted by market fluctuations, as would the original funds in the P&I. Some would do ok, or well, others may not. All hypothetical.

What on earth are you saying re the last 20 yrs rewarding the aggressive investor? Are you referring to Sydney? Plenty of examples of people who held on without gain for many years and either did or didn't sell prior to the boom. Many examples of people who have lost everything they have. I thought you lived in Europe? In any case I don't want to argue, especially with someone who cherry picks details to suit their argument. I don't care what strategy people use. I use both strategies myself, but have no idea why P&I seems so out of favour here. You can have a few IO loans and be maxed out for years and may see little increase in value or you may have P&I loans and be able to continue to invest and catch a rising market. Or the reverse may happen. It doesn't matter. Each to their own.

 

Another perspective on this is to keep the end in mind. That is, imagine you have reached the end of your investment journey, you have a nice property portfolio, fully rented, etc - life is pretty good.

Let's say, you unexpectedly need $100k (could be for alterations to your PPOR as your partner has suffered a disability, could be to assist one of your children who have got themselves into some financial difficulties, etc). The reason doesn't matter but it is private/personal.

You have many options including:
1. Take the money out of your personal bank account if you have it spare. This will reduce your taxable income (interest earned)
2. Take the money out of your super fund. This will reduce your super fund's tax free income.
3. Sell an IP, pay CGT, commission, legal fees etc. This will reduce your net worth (at least by all the selling costs) and rental income.
4. Use the equity in your property portfolio and take out a new loan (assuming the banks approve it at your ripe old age). The interest charged won't be tax deductible.
5. Withdraw the money out of one of your Offsets against an IP. The interest charged is tax deductible.
6. and so on.

They all get you the money but some are a lot better than others.

 

Hi, the aim should be to pay them off over time.

As per the above conversation, there is many ways to do it, offset is popular, but also most loans allow you to pay extra and redraw for free too, but read about all the different reasons why you may, or may not use one method or another, it is not one size fits all.

 

Redraw is an issue though when the usage of the borrowed funds is not for an investment purpose. You'd end up contaminating the loan for tax deductibility purposes, so it is not a preferred solution. An offset account doesn't have that problem.

 

I live in Europe now? I give up!

As for the last 20 years rewarding an aggressive investor. Buy this I meant high LVR IO buy and hold strategy in capital cities that a lot of people on this forum recommend.

Sure Sydney and Melbourne have gone extremely well have t other capital cities have still done well in that timeframe.