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

Non banks that can operate outside of APRA don't necessarily use the regular '3% buffer on actual rate over remaining loan term' methedology. This is why lenders such as Pepper & Liberty have more generous servicing calculators.

It should be noted that this works whilst existing loans are interest only. After the interest only period ends, the repayments will be higher than if they were P&I from the start and the results may be worse in the longer term.

Interest only is a short to medium term benefit with long term consiquences.

 

My question back to Terry was around which banks would consider "paying off your PPOR faster" to be a factor in assessing borrowing capacity - It's not, and I would assume it's not for non-banks too... It has zero influence on cashflow (serviceability).

But I agree that non-banks have more lenient tests, be it related to the buffer, or perhaps considering the I/O loan cashflow vs the reverting P&I one.

Are you saying Pepper or Liberty are happy to look to the I/O loan cashflow for serviceability testing (ignore the reverting P&I)? In which case, I think we're getting somewhere for Whitecat's benefit.

 

The theory with 'paying off your PPOR faster' for better serviceability is generally misunderstood and a bit misleading. I'll try to explain...

Mainstream (APRA regulated) lenders assess existing loans on a P&I calculation of:
1. The loan limit.
2. Loan term remaining (as of today, or as of when the IO period ends).
3. Current interest rate (+3%).

*** If you're looking for an Excel forumla to calculate this, it's the "PMT" function. ***

Items 1 & 2 are usually obtained via your credit report, the interest rate is either accepted at face value (if it's reasonable) or you may need to supply a bank statement.

It stands to reason that if you pay off extra on your PPOR the figure will be lower which increases your borrowing capacity. Hence the extra cash flow from IO investment loans can be well utlised to paying off non-deductible debt and improving serviceability.

Now consider that the other piece of advice commonly given on this forum is to pay off your PPOR via your offset account. Whilst this is generally good advice, it doesn't actually reduce the balance owing on your home loan, it only adjusts the interest calculation. Putting money into redraw doesn't help either as lenders usually use the limit, not the outstanding balance.

So putting suprlus money onto your non deductible debt only really improves serviceability if you use it to reduce the limit of the loan (not just the balance). That means giving up money in the offset account or the redraw.

So does using surplus cash flow from IO loans to pay off PPOR debt improve serviceability? Not really unless you take it a few steps further. In fact the shorter P&I period also comes with a higher IO interest rate so it's actually worse than it would be if the loan had been P&I for the entire loan term.

This doesn't mean an IO loan is a bad thing. From a money efficiency perspective there is no doubt that you should have your investments as P&I whilst you're paying off non-deductible debt. As I mentioned in a previous post, the first 5 years of IO only has a small effect on serviceability and is unlikely to be a game changer for most people.

 

If you really want to push the envelope servicing wise, it's actually better for servicing with some lenders. But a bit worse with 'normal' lenders.

 

every single lender considers this

 

This is incorrect, as was the point in your prior post. For a "here and now I am going for a loan" BC assessment - Proposing a strategy of "I intend to use my extra cashflow that would have gone to principal to instead pay down non-deductible debt" does not improve BC. If the point is simply that the non-deductible debt would be less in future, so improve BC in future, that's a given...

That'll do it for me.

 

Are you telling me that reducing debt will not affect borrowing capacity in a beneficial way?
And that reducing non-deductible debt will not reduce borrowing capacity further?

 

That's rather disingenuous. If you can read at all, you'll know that's not what i'm saying. But I see where this is going, there is nothing further to be gained here.

 

I don't know what you are talking about. I stand by my comments that paying IO can allow for the quicker payment of non-deductible debt which improves borrowing capacity. Not sure what you mean when you say I was wrong.

 

If you’re a portfolio maximiser, ie someone who just wants the largest portfolio size - IO is almost always better. Exception for some high income types (like a lot, 500k+) doesn’t matter because the c/f difference is negligible - they may go P&I for cost savings.

various reasons; non bank funding means higher lending multiple overall, easier to keep entities in positive cash flow, etc etc.

BUT

the reality is MOST are not maximising portfolio investors. In fact, very few are. So P&I is often a much more considered and wise choice, particularly if it helps habits.

 

I am IO on every loan.
Looking to refinance from Pepper before borrowing again.
Was not sure if going P&I on some loans would help serviceability or overall portfolio BC.
But I suspect that the lenders that this would be favourable for, I would likely not service with due to DtI anyway.

 

Where you have multiple loans and no non-deductible debt and are stuck then changing them to PI will improve serviceability in most cases. Whether it will be enough to get you over the line for more borrowing is a different question.

 

Don’t forget to consider that if selling down IP’s to purchase a PPOR, that your ‘new’ PPOR would also have exposure to the market.

Whether it is better or worse exposure than your IP’s is another question.

Given other comments regarding P&I and IO, I would consider building as much as possible in offset rather than pay-down as Terry mentioned so you can ‘move’ the offset funds towards your new PPOR (whenever that may occur).

Good luck

 

For me it would result in less exposure because the borrowing capacity on a ppor is less than on an IP.

 

Going I/O affect your BC as you always need to service the remaining P&I term of the home loan. So if loan term is 30 years / IO 5 years > then servicing is on 25 years P&I. So unfortunately the only option to P&I. This is because APRA changed this lending policy back in 2016.

 

This is incorrect