Why IO in current times?

Most people pick IO over PI to redirect cash flow to other pursuits - business, shares, next IP, PPOR.
Considering the higher IO rates and the compounding effects of paying principal down, why not go with PI and draw equity when you need the cash for your next investment?

Let's say you have a few IPs and are looking at a new PPOR in 2 years. Cash flow difference between PI and IO is 30k per annum. You could pay PI and draw 60k equity in 2 years.
Or you want to invest in index funds annually. Pay PI and draw 30k every year to do so (and tax deduct the 30k).
Alternatively, you prefer to pay down/offset your PPOR. Pay PI and draw 30k every year as above.

This would mean refinancing every time you wanted the extra cash which I suppose would not be feasible if you needed liquid funds monthly for your business or to share trade (gamble!). Is there any other reason to go IO?

 

In your example you would have less tax deductions on $30,000 x interest rate of the main residence loan.

No need to refinance everytime you want to borrow more either - can just borrow more with the same lender.

 

In your example, this would result in higher non-deductible debt and reduced INV debt which isn't ideal.

Add to that that getting equity out is never guaranteed - you might lose a job, bank policy changes, etc...so having access to the cash allows you to make decisions with more control.

 

Thank you. Point noted about not able to access equity when you need it.

The issue of less tax deductions is a case of spend more, save more though! I have taken into account tax deductibility in the spreadsheet.

Using rates of 2.8% IO/2.6% PI, at the highest tax bracket, you "spend" 30k (cash flow difference between PI vs IO in the first year) to pay down 31.5k principal - return on investment 5%, after taking into account lost tax deductions. The ROI increases every year and is higher with bigger PI-IO spreads and lower tax brackets.

This is a common dilemma for the vast majority of us - is there still value in IO for IP so you can redirect funds to PPOR considering the above numbers and how low interest rates are?

Back in the day when PI=IO rate, the ROI would have been miniscule (while interest rates were >5%) in the first few years and IO would have made much more sense.

 

factor in continuously stretching out the PI loan back to 30 years - this makes it a surrogate IO loan.
Also it might be possible to go IO with a PI loan by borrowing the principal payment of the monthly repayment.

 

Aside from the fact that there is no PPOR in your example, personally, all my loans are now PI for my IPs. I say this because I bought my properties post-APRA (my PPOR was just before) and if I want to borrow more, I have to reduce debt... unless I wait 10 years or so to get my gain and then sell.
As you said, PI rates are ridiculously low, so may as well start early.

 

It also very much depends what you're doing with the saved cash-flow. For eg, if you're in accumulation phase, using the cashflow from being IO to increase your asset base more quickly can increase your long term wealth much more significantly than any tax consideration.