Interest Only Loans & Equity

[SebastianMember@sebastianJoin Date: 2003Post Count: 55]

May 29, 2003 - 1:13 am

Hi everyone,

This may sound like a silly question, but let me pose this scenario to you.

If for instance I have properties on interest only loans in order to keep the size of the replayments down and maximise the number of properties I can purchase (as well as the tax benefits). Is it possible to use a lump sum deposit to pay off the principle of a IO loan, during the term of the loan, and hence increase my equity? Or do I for example take out a IO loan for a 1 year period, at the end of that 1 year term pay a chunk off the principle and then roll over into another 1 year IO term (with lower interest repayments as the loan amount less) Is this possible?

I hope this makes sense, if this is possible I would appreciate any comments on this strategy.

Cheers!

Seb[]

[petrarankinMember@petrarankinJoin Date: 2003Post Count: 2]

May 29, 2003 - 1:33 am

It is always possible to make lump sum repayments on interest only loans, but depending on the financial institution you are with they may charge you a fee to do this. The cost can range from nothing to a full break fee costing thousands of dollars so you should probably scrutinise your loan agreement pretty carefully first. Fixed loans usually have higher fees.

Petra Rankin

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Senior Account Manager
National Finance and Trading Group
[email protected]
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[SebastianMember@sebastianJoin Date: 2003Post Count: 55]

May 29, 2003 - 1:59 am

Petra,

Thanks for your reply. So what you are saying is that it is possible to make these lump sum replayments into a IO loan but there may be fees attached… OK Now would these lump sum payments come off your principle and hence affect your future IO replayments by reducing them?

Thanks

Seb

[George1Member@george1Join Date: 2003Post Count: 59]

May 29, 2003 - 6:12 am

It might be possible depending on the facility that you have arranged with your financial institution. If you have what they call a pseudo line of credit, this may be possible. If not, a penalty payment may occur.

If you need any questions answered email me at [email protected]

[petrarankinMember@petrarankinJoin Date: 2003Post Count: 2]

May 30, 2003 - 1:31 am

Interest only loans are calculated on the daily balance of the debt. So if you pay off a large chunk of the principal the balance will reduce accordingly and your interest payments will reduce by the same proportion.

Petra

[JoffMember@joffJoin Date: 2003Post Count: 50]

May 31, 2003 - 8:55 am

I am sorry but i just dont get it with interest only loans.i have only invested in property that is cash flow positive and capable of paying itself off as a stand alone entity.then you get (hopefully)
reduced debt,tax advantages,and capital gains.
negative gearing just doesnt make too much sense.if companies did it it would be called trading while insolvent.negative gearing has been promoted in rapidly rising markets where capital gains outweigh the loss.I reckon we are about to see the results of some very dubious investing stratagies marketed to the inner city apartment sector.
joff

[ldp43.Member@ldp43.Join Date: 2003Post Count: 10]

June 1, 2003 - 4:22 pm

Interest only loans free up extra cash so that you can raise your deposit for the next IP more quickly.(Either in cash or increased equity in your own home).

How long are you planning on holding the IP

50 years age a good IP was $8,000 at interest only, today you could pay it off with your bankcard. In the meantime, the extra cash flow would have hastened the accumulation of further properties.

Laurie