Which is Better:
Interest Only or P&I Loans for Investment properties.
In my opinion… interest only. The advantages are:
– You can make extra regular repayments if you like (subject to any product restrictions). Therefore you can make P&I repayments on IO loan.
– You can redraw any principal repayments (subject to product redraw).
– If cash flow gets tight then you can reduce payments to the bear minimum (i.e. IO).The downside is that some basic variable products do not allow interest only repayments (or they charge a higher rate for IO).
Just my 2 cents.
Cheers
Stu
Property & Finance News
at http://www.prosolution.com.auA quick question for the mortgage brokers.
IO Loans a usually for a period of 5 years. Is this correct? Or can you have an IO loan for an indefinate period of time?
Cheers
The way I understand it is that if you have IO your payments are lower so it gives you more ready cash to use to reinvest or upgrade????I think
Which is Better:Interest Only or P&I Loans for Investment properties.
The loan I currently have is called a portfolio loan which is essentially a line of credit.
It allows you to pay interest only but if your cashflow is positive the principle is paid off. The loan can be drawn on to the established limit without applications or fees.
Cost a little extra in interest but it’s easy to menage.
In my opinion… interest only. The advantages are:– You can make extra regular repayments if you like (subject to any product restrictions). Therefore you can make P&I repayments on IO loan.
– You can redraw any principal repayments (subject to product redraw).
– If cash flow gets tight then you can reduce payments to the bear minimum (i.e. IO).The downside is that some basic variable products do not allow interest only repayments (or they charge a higher rate for IO).
Just my 2 cents.
Cheers
Stu
Property & Finance News
at http://www.prosolution.com.auStuart,
Thanks for your reply.
Much AppreciatedCaptian positive
In my opinion… interest only. The advantages are:– You can make extra regular repayments if you like (subject to any product restrictions). Therefore you can make P&I repayments on IO loan.
– You can redraw any principal repayments (subject to product redraw).
– If cash flow gets tight then you can reduce payments to the bear minimum (i.e. IO).The downside is that some basic variable products do not allow interest only repayments (or they charge a higher rate for IO).
Just my 2 cents.
Cheers
Stu
Property & Finance News
at http://www.prosolution.com.auI’d suggest LOC, it gives you the best of both worlds.
With most LOC you have the option of only paying the interest or paying down principal if you wish.
Which can easily be redrawn if required.Some of the straight IO loans have limitations on the amount of principal repayments that can be made per year.
The main downside with a LOC however is that you usually can’t fix the interest rate.
Rod.
Hi Guys,
I’d be a little careful with LOC loans and investment properties. The ATO consider a reduction of the principle as a repayment and this is a headache.
I suggest the following but it depends on your circumstance …
If you still owe money on your PPOR then pay that off and using either a LOC loan or 100% offset loan. (I prefer 100% offset loans as the interest rate is generally better for a basic loan). Any IPs should then be Interest Only so that you are maximising any tax benefits and paying off your PPOR sooner.
If you have payed off your PPOR and have a few IPs then I suggest having one of IP loans with a 100% offset and the remainder IO. This way you can pay off some principle while hunting for the next IP, maximising any spare cash you may have in the offset account. The offset account also isolates cash you may have so that you can spend it elsewhere whenever you like and hence don’t have the problem mentioned above with LOC loans.
Hope this helps.
D
Hi D,
You’ve made valid points. Personally my LOC is completely seperate from personal funds and any withdrawals from it are only used for investment purposes- thus keeping the interest tax deductible.
Rod.
Dear Rod,
Being new in property investment Can you please explain me what is LOC and how it works I have heared about it in couple of places but couldn’t understand what is it?
Thanks
Amit
I’d suggest LOC, it gives you the best of both worlds.With most LOC you have the option of only paying the interest or paying down principal if you wish.
Which can easily be redrawn if required.Some of the straight IO loans have limitations on the amount of principal repayments that can be made per year.
The main downside with a LOC however is that you usually can’t fix the interest rate.
Rod.
With a line of credit if you have the right one can fix part of it. You must have at least $2,000 variable so you can pay money into the loan and redraw it.
The Portfolio loan from St George has regularly been voted the best LOC on the market. If you borrow more than $150,000 you are entitled to an interest rate reduction.
The Line of credit is like a big credit card secured by your home. However, you pay your salary into the account or your rent or both depending on whether or not you have personal and investment debt with the loan.
As a pure investment loan it is always interest only so you do not have to renegotiate the loan every five years.
I would recommend a 100% offset loan with your PPOR but think a LOC is much better for investment because of the flxibility offered.
A quick question for the mortgage brokers.IO Loans a usually for a period of 5 years. Is this correct? Or can you have an IO loan for an indefinate period of time?
Cheers
A quick question for the mortgage brokers.IO Loans a usually for a period of 5 years. Is this correct? Or can you have an IO loan for an indefinate period of time?
Cheers
Simply re-financed to another I/O loan after the five years is up.
Don’t have much time but feel I have to respond.
1. Most IO periods are for 5 years. ANZ offers 10 years and St George offers 15. An indefinite IO period = LOC.
2. LOC are often a waste of money – too expensive. Normally only 1 out of 10 people that think they need a LOC actually do. You are better off (from a cost perspective) to use an offset or basic loan.
3. St George’s LOC is ok but too expensive.
– High ongoing fees ($10 per month, per sub-account)
– Break fees of $1,000 for 3 years.ANZ’s LOC is much, much better (higher interest rate discounts, less fees, no break costs).
I’m writting an article for The Australian about LOC’s and will let you know when its published.
Cheers
Stu
Property & Finance News
at http://www.prosolution.com.auStuart,
Under what circumstances are the break fees enforced?
Is the fee fixed at a flat rate of $1000 with St George?
Cheers Brett
Stu,
You’re right some of the ongoing fees with LOC’s can be expensive. (I think CBA’s are $12 per month!).
Westpac’s seems alright. I’ve got a mix of LOC’s and basic/offset loans and pay the same interest rate on all of them with one annual fee ($300) on their professional package.
I’ll be interested in seeing your article.
Amit,
Davo70’s done a good job of describing the LOC – a big credit card secured against property. And just like a credit card they can be very dangerous. I agree with Davo70, I like the flexibility for investment purposes, but if I was paying off a PPOR as well (which I’m not) a 100% offset loan would probably be a better bet.
Rod.
IO loans are better because of what was mentioned above,
but I believe the sine qua non for IO is the fact that inflation will errode at the initial gearged capital.Thankyou to you for your comments.
It seems there a bit both ways on this subject.
Perhaps it comes down to what the individual is comfortable with.Regards,
Captain Positive
Don’t have much time but feel I have to respond.1. Most IO periods are for 5 years. ANZ offers 10 years and St George offers 15. An indefinite IO period = LOC.
2. LOC are often a waste of money – too expensive. Normally only 1 out of 10 people that think they need a LOC actually do. You are better off (from a cost perspective) to use an offset or basic loan.
3. St George’s LOC is ok but too expensive.
– High ongoing fees ($10 per month, per sub-account)
– Break fees of $1,000 for 3 years.ANZ’s LOC is much, much better (higher interest rate discounts, less fees, no break costs).
I’m writting an article for The Australian about LOC’s and will let you know when its published.
Cheers
Stu
Property & Finance News
at http://www.prosolution.com.au
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