What is better for BC interest only or p and I?

What is this thing that they say about interest only loans reduce your borrowing capacity?
I get it that it means that it has a compressed loan term when it comes off the interest only but your cash flow is so much better.

If interest only loans affect your borrowing capacity why would people bother with them?

Can someone please confirm whether it's better to have loans I/O or p&i if trying to accumulate

 

because it improves cashflow and allows a person to pay off their non-deductible debt sooner.

 

I always suggest IO if you've got a home loan, or are starting out in the property market - there are so many advantages.

• Increased cashflow
• Using increased cash flow to save deposits or
• pay off OO debt or
• build up a buffer or
• diversify into shares...

But NOT

• More overseas holidays or
• shoes.

IO is leverage - more assets, more quickly. And more borrowing capacity if you have the guts to go with quirky lenders like Liberty and Pepper.

 

Improves cashflow and allows you to pay down your non tax deductible debt first and faster.

 

It depends

 

I dont have any non-deductable debt. no ppor. does that change things?

 

Will you likely get some at some point?

 

Compressing the P&I preiod to 25 years instead of 30 does reduce borrowing capacity by not really that much. 10 years IO with a 20 year P&I period has a massive effect on borrowing capacity.

 

Better cashflow and if structured correctly, allows better borrowing capacity with certain lenders, which means picking up more properties.

The downside is if you cannot refi after the IO period finishes, then you're paying P&I on 25 years loan term.

 

Right so this is the nuance it allows better cashflow with CERTAIN lenders. I.e. third tiers? I know they take it at 'face value' so to speak.

 

Once it switches to P & I can you still approach a different bank and go back to IO?

 

I just dont know.
I would like to live in a ppor now tbh. but would need to sell down and reduce my portfolio exposure which doesnt seem strategic atm. So continuing to rentvest.

 

Some lenders will allow up to 10 years IO in 1 go, or 2x 5 years IO, assuming you can service it and age/exit strategy is not an issue.

Even after 10 years IO, you can just go to a different lender - all dependent on servicing.

 

Yes

 

By not having your loans IO you are paying down investment debt and that means borrowing more for any future main residence. This will be tax ineffective.

I would suggest you get some tax advice on borrowing to pay your loans - capitalising interest and also borrowing to pay principal (a separate strategy) - basically paying IO on a PI loan. This can hurt borrowing capacity but can quickly be unwound and loans reduced if you have to so no real disadvantage with borrowing capacity.

 

Borrowing capacity: I/O reduces borrowing capacity because banks will look to the remaining loan term after I/O period in their serviceability testing - Shorter term P&I means higher repayments means greater hit to cashflow means lower borrowing capacity. The bank, of course, assumes you must pay off this loan (hence they won't look to the I/O period for cashflow)... That said - It's not that much different...

Outside borrowing capacity: I/O is beneficial because despite the slightly higher rate you might pay, the principal you would otherwise have paid *could* be better served going "somewhere else" - Whether that's a non-deductible PPOR mortgage, or, some other investment. Said another way - The principal you would have paid could see a better return somewhere else especially given the interest on the IP is deductible.

 

at the same time IO could also improve borrowing capacity as it allows the quicker repayment of non-deductible debt (not in this op's case though as he has none)

 

No it doesn't change things unless you're close to retirement.
If you're still in asset accumulation stage, IO makes sense because you'll be able to use the cash flow to buy more assets rather than tying it up with debt reduction.

 

What bank considers this in their serviceability tests to assess borrowing capacity? I'd assume zero.

Even if they did, all it would do is reduce the non-deductible debt loan term - The repayments wouldn't change, so in terms of a serviceability test, the outcome remains the same.

The only thing that would achieve a better borrowing capacity is if the lender were happy to look to the interest-only loan cashflow vs the reverting shortened P&I loan cashflow.

To which the question is: Which lenders do that?

 

ok. I thought it adversely affected servicing calculators as @DrDollar was saying.
But it depends on the lender as @Justin_Z was saying