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What is the benefit of an interest only loan?1 2andrea01 [12 Posts] Hi Everyone, I would like to know if there is any benefit in purchasing a properyty with an interest only loan instead of interest/principal. There doesn't seem to be a huge difference in the monthly repayment amount. Thanks Andrea Joseph12 [25 Posts] To free up cash flow as repayments are less and so to borrow more and buy more property, although the repayments at the start of the loan are mostly made up of interest and a minimal amount of principal. Over the long term as the balance reduces you will be paying less of the interest and more of the principal. However back in Feb 2005 your mortgage magazine edition under the heading 'Why property is a good investment' Steve Knight advised he pays principal and interest repayments. Probably due to increasing the equity in the property by having the principal reduced. If their is another reason or if i am incorrect please advise ?   MortgagePlus [29 Posts] The main benefit of an interest only loan is that it gives the borrower added flexibility. With a P&I loan, the lender expects a small amount of the principal to be paid off each f/n or month. Each time this occurs, the effective credit limit of the loan is also reduced. Also, your minimum monthly commitment is higher. P&I = 1 choice. A principal and Interest repayment and no further access to your funds. I hope that helps. Tim O'Shea carlin [130 Posts] Paying interest only means not just leaves more money to buy more IPs but also more money to pay down non-deductible debt on your PPOR. Can't see the benefit off paying down principal on an IP when you still have outstanding debt on your PPOR. Scott No Mates [762 Posts]  You should also keep in mind that an IO loan operates best in a rising market as your property value increases your loan remains static and your LVR decreases whereas in a falling market the risk is your loan may outstrip your capital (PI will at least contribute towards stabilising the LVR). god_of_money [155 Posts] Just beware of static or falling of property price in current investment climate. ruk [14 Posts] my reason for interest only loans. Borrow $400,000 in 2008. Pay it off in 2033, when $400,000 will be the cost of a small car. There are lots of other benefits too, as mentioned before, but I like this one the best. Qlds007 [4117 Posts]  What happens if 5 years down the track when you have paid off 100K of principal or so on your PPOR you decide to buy another PPOR and rent this one out. You need 100% + costs of the new purchase price but are shocked to realise that only the existing balance is deductible on your current home loan and that the new PPOR will have 106% borrowing of non deductible debt. Had you taken an interest only loan from the start (the interest savings is exactly the same) you could have switched the offset account to the new PPOR and now the full debt on the existing home would be deductible. Cheers Yours in Finance god_of_money [155 Posts] Yes ruk... but the total interest repayment over 25 years would be 1 million+ In today price, the cost of small car is less than A$20,000 and average sydney house price is A$550k Cheers Donald Event Horizon [47 Posts] I have another interest only question. I have an Interest only loan on my PPOR with an offset account attached, AM i better of switching the loan to principal and interest and attached to the same offsett account. Is there actually any difference finanically. Advise appreciated.. Qlds007 [4117 Posts] Non at all keep it as interest only. Cheers Yours in Finance Shaun M Smith [16 Posts]  The good thing about interest only repayments is that your minimum monthly/fortnightly or weekly commitment is reduced freeing up cas flow. If you have a variable rate facility you can generally make additional repayments at any time without penalty. If you have a fixed rate facility you can generally repay up to $10K per annum as a rule without penalty. Therefore when you have additional funds to pay down the loan you can, if you dont at the time you dont have to Shaun Smith | Managing Director | CDS Financial Services kenzel [43 Posts] " What happens if 5 years down the track when you have paid off 100K of principal or so on your PPOR you decide to buy another PPOR and rent this one out. You need 100% + costs of the new purchase price but are shocked to realise that only the existing balance is deductible on your current home loan and that the new PPOR will have 106% borrowing of non deductible debt. Had you taken an interest only loan from the start (the interest savings is exactly the same) you could have switched the offset account to the new PPOR and now the full debt on the existing home would be deductible" To Richard - Please correct me if I'm wrong but I always thought that interest repayment paid on a non-income producing asset (i.e. PPOR) is not tax deductable regardless of whether it's an IP or IO loan. Qlds007 [4117 Posts] Kenzel The interest on the balance as at the time you make the property a IP is deductible however you are unable to refinance and redraw the funds or take out any advance payments and still get the same deduction. The 100% offset account gives you the same benefit and the net savings is identical. Difference being when you move out and make the property an IP you can withdraw the cash funds in the offset A/c and the full interest on the loan balance becomes deductible. Sorry if it sounds confusing it really isnt at heart. Cheers Yours in Finance kenzel [43 Posts] "however you are unable to refinance and redraw the funds or take out any advance payments and still get the same deduction." Richard - is this because the extra payments made were into a PPOR? What happens when the PPOR is turned into an IP with extra payments continuing and 6 months down the track you decide to refinance, is the extra payment you've made since the property has turned into an IP tax deductible? Qlds007 [4117 Posts] Hi Kenzel The determining factor applied by the ATO to ascertain whether the interest is deductible relates soley to the "Purpose of the Loan". By keeping the loan and the offset account separate their is no doubt and all you would do is link the offset account to the new PPOR when you rent out the existing property. Cheers Yours in Finance JodieD [7 Posts]  Hi, Qlds007 [4117 Posts] Jodie Mhhh sounds like a wee bit of a mess to me. I think you probably need a bit of overhaul there but certainly if you use the available equity in the house do set it up as a separate standalone account. Cheers Yours in Finance JodieD [7 Posts] Hi Richard, Qlds007 [4117 Posts] I would have tried to split the loan back to the original balance you used to purchase the new property and then a separate loan for the rest. If you had some equity in the original purchase price (and on the basis that the loan did not exceed the original purchase price) then you might get away with some consolidation however cleaner to start with a fresh lender rather than have loan statements that show a redraw or refinance in them. Make the original loan Interest only and the non deductible part P & I and link the 100% offset account to this loan. Drop me a line if you need any other clarification. Cheers Yours in Finance 1 2 |
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