Howdy All,
This a question about Interest Only Loans. I am not exactly sure on the Concept. I’ll outline what I think and some can explain it too me if I am wrong.
OK
– I take out a Interest Only Mortgage for 10 years.
– Each month I am required to pay the Interest on the Mortgage.
– At the end of the 10 year term I am required to pay the lent amount in full.
IS THIS RIGHT???If so would the general concesus on these kinds of mortgages be that they are taken out with the idea of selling up the property at the end of term and paying the banks the original Principle.
I look forward to your responses.
Cheers
AlexYou’ve got the general concept correct except:
You don’t need to sell, you can refinance to another IO loan or to a P&I loan. In fact you’ll find that many of the IO loans convert to a standard 25yr P&I loan at the end of the fixed period.
Rod.
Hi Teylu and welcome. Don’t forget that with an interest only loan you can also make additional payments over the term of the I/O time frame, thus reducing the repaymets along the way and when it converts to P&I. Check with your mortgage originator or broker.
Cheers
Marty
Cheers Rod.
Can anyone give me the Pros and Cons of Interest Only versus Principle and Interet for a First Time Investor??
Your personal experience would be great to hear.
As I am going to be a investing soon I wanted see what everyone thinks?
Thanks
AlexIn numbers terms:
If you take out a 30 year loan of $200,000 at 6% interest rate, and take the first 5 years I/O and don’t change anything else about the loan, then you will pay interest only for first 5 years ($1,000 per month), then basically a P&I loan for the remaining 25 year term (approx $1,290 per month).
Personally it’s never made sense to me to pay interest only for good quality property (from yield or growth perspective) unless your strategy is to definitely resell in a short space of time. To paraphrase Steve’s Grandfather (cos I can’t find the quote in the book) – no one ever got into financial trouble owing too little ….
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MelThe biggest advantage of Interest Only, is the increased cash flow. Quite simply, it could mean the differrence betweenbeing positively gearedor negatively geared. Remember, if you are positively geared, there is no limit to the number of properties you can buy.
Dan.
If you want an extraordinary life you have to be prepared to do things that ordinary people aren’t prepared to do.
Call me conservative or just a plain old fuddy duddy but I am all for a positive cashflow property on P & I Loans. If you have to tweek the deal to make it positive chances are it isn’t going to remain that way if rates change. However, I am not doing traditional buy & holds anyway. Maybe I will change my tune with more experience. Just remember my grandmother saying beware of being endebted to anyone.
Gidday Teylu
Melanie covered it pretty well with the dollars and cents. I think that a loan has to be styled to suit your circumstance. I/O loans are or can be very advantages depending on your personnel tax situation. If after the tax axe falls you have some left over then it can be applied to reducing the principal. (refer maximus) Have a chat to your accountant if you need specific advise for your situation.
Good to see you getting ready to move
Spider
Sorry, I just see principal payments as a mediocre investment of about 3% after tax.
IO loans are good for increasing cashflow, but another important point that everyone seems to forget is the taxation of inflation.
If u borrow $100k now and pay IO for 10 years, u still only owe $100k in 10 years time which is significant less if u take inflation into account.
Warren Buffet talks about this all the timeWhich bank and lender gives more than a 5 yr interest only loan?
Good point Div43 especially if actively buying regularly and happy with higher risk re property value. Still think that if it’s a good positive cash flow property and I don’t need to live on the difference, I’d rather own $200,000 (price doubles in 10years) many times over then own $100,000 & owe $100,000 many times over.
Re longer I/O terms, most people shop around and refinance to a better loan product at the end of 5 years for another I/O term. Not sure what longest single period on offer is, good question – anyone??
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MelLoanstar in Qld offer a 10 year Interest only loan and I believe the ANZ Bank also offer a 7 year interest only loan.
I will check and get back to you guys.
David
Thanks!
Notice ANZ, Westpac, NAB and Homeloans Ltd all offer 10 year fixed – at around 7.3% – but not sure if they allow that to be I/O too.
Cheers,
MelIt comes down to whether you want to be pretty sure of being rich or slightly less sure of being VERY rich. If you use the excess cash after paying interest & costs to reduce the capital, you save about 6% interest on that amount the first year, 12% next year etc.
If you instead use the money as a deposit to buy another property you are expanding your portfolio without spending any more money. The question has been discussed on the forum before as to how much is enough. DO you want 130 properties with a huge debt, or would you sleep more easily with a lesser number all paid off producing income for the rest of your life?
The real problem is what will you do if interest rates pass 10% again. I don’t believe anyone can guarantee that would never happen. If you owe little, you will be laughing. If you can’t make the payments, you may have to sell a couple (at a good profit) to pay for the others. You will still have the others which you could never have afforded otherwise.
Melanie is correct they do offer interest only to ten years. It is on their a fixed rate and they will only allow to 80%.
Loanstar who I only just found out about offer I/O ten years on both fixed and variable rates. Although they also will only go to 80% of the property value.
Hope this helps.
davo70Teylu
Depending also if your principle place of residence has a mortgage (as mine does), I have opted to take IO loans on IP’s because
1/ the interest is tax deductible against any profits or otherwise your income. Paying principle on top of this increases your profit (as less cost of interest on the IP) and hence your tax bill
2/ Any left over cash (which it is assumed you will have if you are considering P&I will be better put into your loan for the property you live in as the interest is not tax deductible and these extra payments will reduce your non dedcutible interest bill each year.
3/ This means you can take out a no frills lower cost I/O loans for your IP’s (without extra features that generally add to the costs/fees associated with them)Of course, check with your accountant on the best structure for you.
Regards[8D]
Forgot to add, might be worth considering the recent article about interest rates in the future
http://www.smh.com.au/articles/2003/08/25/1061663735507.htmlRegards
thanks
Thanks everyone for your responses I am definately starting to get my heah around the whole thing.
I don’t currently have a mortgage but I am living with my folks. My girl freind and myself are looking to buy a residence to live in for ourselves. Aside from that I am also looking to invest with my old man using the equity in his house as a deposit for my first +ve geared property (actually first property all up).
Interest Only for the initial period then P&I sounds like a good option with out getting in too deep to start off.
Cheers
Teylu
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