Hi everyone,
I’d like a bit of advice on which way to structure my loans. I have a L.O.C. which I use for the 20% deposit and then I obtain a loan for 80%. I believed that int. only and locking in for 3 – 5 yrs was the way to go, but now I am not so sure. Any suggestions would be appreciated. I am pretty new to all of this.
Thanks,
Del[
]Hi there Wilandel.
I am of the opinion that an interest only loan is viable if you are looking to sell the property in the near future to get a capital gain. For instance i would get interest only if i were going to buy a property and do it up and sell it for a capital gain.
If my objective was for positive cash flow i would take out a principal and interest loan as the tennant is reducing my debt on the loan and building me equity. If this is my objective then i don’t really see the point of taking out an interest only loan as the principle borrowed is not reducing.
My 2 cents.
Hi there Wilandel.I am of the opinion that an interest only loan is viable if you are looking to sell the property in the near future to get a capital gain. For instance i would get interest only if i were going to buy a property and do it up and sell it for a capital gain.
If my objective was for positive cash flow i would take out a principal and interest loan as the tennant is reducing my debt on the loan and building me equity. If this is my objective then i don’t really see the point of taking out an interest only loan as the principle borrowed is not reducing.
My 2 cents.
Thanks JUMBO,
I get your point, it does seem to make good sense to reduce the loan, otherwise it can seem at times like you are not achieving much.
Thanks,
WIL AN DELFor me, whether I use IO or P&I depends on where I’m at.
Right now, I’m trying to build up cashflow by buying lots of properties to wrap, so I want every cent I have to go into deposits for more houses. Therefore all of my loans are IO right now.
Once I achieve the goals I have written down, then I will start to pay down the underlying loans on the properties and so increase the cashflow without having to buy more for now.
So right now I use IO, but ask me that question again further down the track and the answer will have changed. []Keep smiling
FelicityHi Wilandel
An interest only loan is suitable if your goal is to achieve positive cashflow on your investment. Basically, with an interest only loan you are actually making your money (that you put down as deposit) work harder for you. I see no reason to increase equity in your investment if your goal is to achieve the maximum return on equity. For example if you bought a property for say, $100,000 and you had to put down 20% deposit, so you’re borrowing $80,000. At an annual interest rate of 6% your annual cost of servicing the loan is $4,800. Say your property rents at $125 per week, or $6,500 p.a. Assuming that that is all your cost of investing in this property, your net +ve cashflow = $6500 – $4,800 = $1,700. Hence your return on equity = 8.5% ($1,700/$20,000). Now if you were to start paying “principal” toward your loan, your equity indeed rises, but your ROE drops making the return on your property less attractive.
Again, this is a simple illustration without taking into acount stamp duty, real estate fees etc but the formula is simple and applies to most investments. I agree with Felicity in that, if your goal is to accumulate rather than increase ownership in the one property, defer or avoid paying off principal. One thing to note though is to put down a deposit that you think would cover a potential “adverse” move in property prices in general. Good luck.
regards
4wall’s husbandHello Felicity & 4Walls husband,
Thanks for the insight into the way you are operating. I can see now that it is not black & white !! It all depends on your circumstances. I think that until I get started in wrapping, I will make my loans P & I. My returns may not look as great on paper, but I can see that my debt is reducing. With the prospect of war just around the corner, I want to minimize my exposure and sleep better at night!!! Thanks again and best of luck!
Del[]Hi Wilandel.
Dolf Deroos argument is that he loves debt! over the long term it is eroded by inflation while your property accumulates in value.Wilandel,
I found this string and was wondering which way you are leaning towards now seeing as you are on the mentoring thingy with Steve.Did you decide interest only, P&I or LOC? Tell us how you came about your decision too please.
Cheers
Steph.Success is 1% inspiration and 99% perspiration.
Hi Del
For my two cents, I agree with Felicity, I am building up and so want to keep as much as possible while OPM is letting do this.
Also just wondering if you ment
I think that until I get started in wrapping, I will make my loans P & I.I thought YOU would WRAP P&I also.
Cheers
Leigh K[]Read, learn, grow but most of all do it.
Hi Steph & Leigh,
All our loans so far have been P&I. If we wrap the loan will DEFINATELY be P&I. Things have changed recently now that we’re selling our home, and getting rid of our LOC etc (reducing our “bad” debt).
We have talked about having 3 x P&I loans, to 1 x IO loan, and keeping the majority reducing our overall debt, but with one with good prospect for capital gain at Interest only. 3:1 ratio sounds OK to us at the moment, but no doubt we will reassess things in 12 months or so.
Our main reasoning for P&I is if something happens to one of us, we don’t want the other left with hundreds of thousands of debt!!
What are your thoughts?
Have a great week all,[
]Del
YEah, Cremin and I have been discussing what sort of loans we will be wanting for our properties (All theoretical at the moment…[
]) and have been tossing up both ideas.The conclusion we came to was, we would probably use P&I loans to start with, provided there is leeway with the income coming in for those unexpected expenses, but would consider IO loans if we were wanting more income for ourselves.
Our goal is to have our PPOR paid off as quickly as possible (So then I can have KIDDIES!!!) and then gradually pay off the other houses.
I am pleased to hear peoples different explanations why they choose the different loans and their reasons.
Can I ask why you got rid of you LOC? We were thinking of having part of our PPOR loan as LOC to keep flexibility and call on cash for those deposits.
We are still doing our research though and finding the best deal will be interesting…
Cheers
Steph.Success is 1% inspiration and 99% perspiration.
Hi Scremin,
Because when you use a LOC, you are using 80% stand alone loan, 20% deposit from LOC, and 5% s/duty & costs from LOC. 105% finance.
If you pay out your PPOR, get rid of your LOC all that debit interest that you pay every month on your LOC, suddenly goes directly to YOU !!
The difference in the figures is amazing!
Also, with our PPOR, we would only be able to access 80% for a LOC, which is leaving too much money lying around not working for us!
If you flick through the past posts, a few days ago there was an interesting post called “Sell home, rent & Invest”.
Del [
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