Could some-one please clear up some stuff on Interest only loans.
From my understanding with IO loans you only pay the interest on the loan for a period of time, thus payments are lower and the principal loan is still the full amount to gain maximum tax benefits.
When the IO period ends you're left with the full loan ammount and less years to pay thus driving up repayments.
Also the total payments seem to be more.Do the pros really outwiegh the cons, how would this be beneficial with multiple properties in a portfolio.
If I have multiple properties and they all start becoming principle only after the IO period is finished then this will surely force them to be negitivly geared as the repayments increase.Thanks for the help
Cheers
Denis
If you are investing and you are needing most of your capital, I would suggest the interest only loan and pay off principle when you can.
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zimby wrote:Could some-one please clear up some stuff on Interest only loans.From my understanding with IO loans you only pay the interest on the loan for a period of time, thus payments are lower and the principal loan is still the full amount to gain maximum tax benefits.
When the IO period ends you're left with the full loan ammount and less years to pay thus driving up repayments.
Also the total payments seem to be more.Do the pros really outwiegh the cons, how would this be beneficial with multiple properties in a portfolio.
If I have multiple properties and they all start becoming principle only after the IO period is finished then this will surely force them to be negitivly geared as the repayments increase.Thanks for the help
Cheers
Denis
Ignore the american spam above
Firstly, you need to understand some simple tax concepts to really understand IO loans. It is simple, but often overlooked.
Your own home loan is not deductible, while a investment loan is deductible. There are benefits to be gains by paying the home loan down asap – you save interest which you cannot claim a deduction on. So there is not point in paying down a loan on an investment while you still have a home loan – you will be losing money.The main reason in using an IO loan is to pay off non-deductible debt first.
Assuming you have paid off your home loan already, the payments on an IO loan are lower. This gives you a few benefits. Less cash out of your pocket means you can afford more investments. eg you may put the extra into shares, or buy another property. Properties are often negative cashflow in the begining but this will change as rents increase so after 5 years your loan may change to PI resulting in higher repayments but the extra rent may cover this.
There is also an additional tax reason to keep all loans IO and that is once you pay down a loan the money is gone -it is a repayment. If you suddenly need some cash and redraw the extra repayments, the extra interest incurred will only be deductible if it is used for investment purposes. So you may start off with a $500,000 loan, and pay this down to $1 over 10 years, then decide you want to buy a Ferrari and withdraw the money – the interest claimable will only be on $1, despite you having a loan of $500,000. If you had an IO loan, and used a 100% offset account for the extra deposits all the interest would be deductible.
Same effect as paying down the loan, but more tax effective.There is no real reason to pay down a loan ever, if you qualify you can keep extending the IO period when it expires.
Imagine if you purchased a house in sydney for $16,000 in 1960 with an IO loan and kept it IO all the way. Your annual rent would be more than the origina loan now.
Sorry for rambling on!!!!
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Hi Terry
Rambling is good, whats ramble to you is valuable information to me
So the best path for my first house would be IO with offset, allowing me to save for next house?
Only when I move from the house or buy a second house can I claim tax on the principal?Cheers
Denis
Denis
The other important factor with an interest only loan is the flexibility which is key.
You may decide to buy a house and live in there for ever and a day but alternatively you might just use the first house as a stepping stone to buying a bigger home in a few years.
Interest only gives you choice.
Richard Taylor | Australia's leading private lender
Thanks Gents, always appreciated.
I need a crash course in economics.Terry,
you mentioned above that you can extend your IO loans if you qualify…
what is the criteria to determine if you qualify?
Also how long can you keep it IO if you qualify? ongoing forever?
Thanks in advance,
Shivasko
Most IO loans are for around 5 years, then reverting to PI automatically. Some banks go up to 10 years, others 15 years. If you want to stay on IO after this intitial period some banks require you to requlify again – so have to supply updated payslips etc.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Great advice Terry & Richard as always, well done. Just the support a newbie is looking for in this forum!
Hydra
".. a second house can I claim tax on the principal?"
Zimby, to my knowledge you can't claim on the principal, only the interest portion of the loan on your investment is deductible.
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