Like the subject above!
What is the purpose of paying principal+interest
and Interest only repayments…Thanks in advance!
Tam
I/O loans are generally lower repayments over the same period as P/I and can leave you extra cash for other properties, but you still owe the same amount you borrowed. P/I loans pay some off the principle and this generally gives you faster equity than a I/O of the same value at the same interest if both are achieving the same CG. This is just the general basics and I’m sure other people can explain a lot further for you.
C2
” Is it true the more you owe the more you grow until the banks step in?”
There is a point at which this credit binge will end and rates will go up. Prudence would suggest to many people at this time that it would be handy to seriously think about how you will reduce your total debt.
Rates cannot stay this low for ever. Come Nov next year when George W has to let rates rise it will be carnage and cash will be king!
IO loan repayments are very similar to principle and interest payments in value. For the sake of a few bucks a week (depending on mortgage size) I think IO just isn’t worth it.
I believe that it is best to take out an interest only loan for your IPs only if you are still paying off your PPOR.
Because the interest you pay on your own house is not tax deductable, and the interst on your IP is tax deductable.But I think that once you’ve paid off your own home, it may be better to have a P&I loan for your IPs, so as to reduce your debt.
THis is just my opinion though, you may see it differently.I prefer to leave the loan on interest only permanently as long as I can make principal payments should I want to.
This makes it easy to check that the bank is calculating interest correctly.
When I decide I want to reduce the loan balance I just pay some money back.
My ideal loan type is revolving credit as this gives you full control of what happens.
I went and asked my bank manager this same question and he said if you have an existing IO loan and apply for another loan it will be harder to get as the bank sees that your debt is not reducing over the years.
Ask for yourself as I cannot fully remember the conversation. Either way I was talked out of it.
Nu Gen
Graeme your bank should be showing interest charged on each monthly statement, even with P/I loans. It’s not difficult to check their maths, but it’s a bit more tricky if you have an offset account that varies during the month.
As I’ve analysed on a previous post, there isn’t much cost difference between IO and P/I in terms of present worth of all payments, especially if you are in the top tax bracket. This is because the cost after tax is much the same as inflation.
With P/I you are putting in extra of today’s dollars to save depreciated future dollars.
Jim.
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