Hi y’all. Whilst I understand how an interest only loan works, I was wondering what peoples thoughts are on the following. If I had an I/O loan, lets assume $100,000 for 5 years before converting to P&I, wouldn’t I be better off making extra payments on the loan within the 5 year period so that when it did convert to P&I the principal would have been already reduced thus lower repayments. I just thought it may free up cash while still I/O and if I had spare cash at any time to pay on the loan it would still make monthly payments a fraction smaller.
Thanx againSounds to me like you’ve got it all worked out. If you can use the extra cash more effectively over the next 5 years then go for it. However are there any fees associated with converting the loan from I/O to P&I and will that eat into any benefits?
Justin x
Maximus
Generally, the minimum P&I repayments (to apply after IO period) are already set out in the loan documents when you first take out the loan. So repaying principal will have no affect (but check with your loan docs).
Most lenders will let you roll over into another 5 or 10 year interest only period after the first one has expired. So you could essentially have an IO facility ongoing if you wanted.
Cheers
Stu
Property & Finance News
at http://www.prosolution.com.auIt depends. Generally speaking, if you have outstanding debt to pay off such as a home mortgage or personal loan, it may be more tax effective to keep it as an interest only loan until that debt is fully paid off. . i.e. home mortgages and personal loans not being tax deductible offer no tax benefit in maintaining.
That said, it would also depend on the gearing of your IP and any tax benefits associated with it such as depreciation etc.. and cash losses.
Check the clauses on your finance contract – you may well find that you are unable to repay any principle off during the IO period and any extra that you do pay is credited to the interest payments ie if your monthly IO payments are (say) $100 p/m and you pay a lump sum of $1,000 that just puts you ahead by 10 payments.
As I said, check the fine print on the contract before doing anything.
Dianne
“Make a decision, take the risk, pay the price, or reap the rewards”
The whole idea of IO is not to pay the priciple. You pay the price for IO loans ie Higher interest rate, fees ect. I would not treat a IO loan like a P&I loan for that reason.
I am assuming that your IO loan is for an IP. If that is the case then there is no point in paying it off early for whatever reason. You can only claim deductions on the Interest component so don’t reduce the amount of money that you are paying and claiming that interest on!!
wouldn’t I be better off making extra payments on the loan within the 5 year period so that when it did convert to P&I the principal would have been already reduced thus lower repayments.
As mentioned in previous post, the interest only loan can be extended in most cases so I would not convert to P&I for as long as possible.
Secondly, I’m not sure about this but just because you might pay of some of the priciple does not mean that you will have lower repayments. I have been ahead of my payment schedual for years but now one has offered to reduce my payments.
Thirdly, if you have some spare money to do this them I would be putting that aside to invest into another property.Good luck
Thanx for your advice guys. I probably should have clarified that what I’m trying to do is eliminate debt. I’m not too worried about losing the tax benefits. The point I was trying to make was that I could reduce monthly repayments by paying extra off my I/O loan (if I choose to) but wasn’t compelled. It is only MY belief, but I think that interest rates will eventually rise and I want to have a “safety net”.
Thanx again
Marty
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