Just a quick question for the elite[withstupid]
What is the difference between the two loans.
I+P and I/OCheers
Tridean34 Developments
P&I is principle and interest. The payment you make is part interest and part principal. It means you are paying the loan down and will own the property after the loan term or quicker if you pay extra.
IO is interest only and means that for the first 5-10 years you are only paying the interst component. After that period the debt will remain the same.
They both have their place.
A basic rule is that as only the Interest component is tax deductible it makes sense to pay out any non deductible debt before making an IP P&I.
Make sense?
Simon Macks
Mortgage Broker
http://www.mortgagehunter.com.au
0425 228 985Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
Simon (or anyone who can answer),
Is the point of an IO loan that one can buy many more IP’s at the same time? Are the repayments less on an IO loan? If so, how much less are they, say on a $500 week loan?
What happens when you have paid out the IO loan? Do you then have to pay a lump sum to pay out the principle? And how do people do that? Do they simply have to sell the IP to make the repayments? And if this is so, would this type of loan not be for people who wish to buy and hold for a longer perdio (like forever)?
I’m aware that IO loans are really only for properties that might have substantial CG. I’m just wondering if people might let me know how they might suit the smaller investor who wishes to build the portfolio.
Thanks!!
kay henry
Hi Kay,
I have a I/O loan on all my IP’s. This has in part enabled me to reduce outgoings to service each of the loans.
The difference between I/O and P/I for my IP’s are
approx. $225 & $240 per month. Of course these loans are relatively new so the differential won’t be great.Paid out I/O loan??
Do you mean the time period that I/O loans are normally allowed? You would either go to P&I or refinance to another I/O loan.James
Hi kay
You are right in that IO loans are basically so that we can buy more properties with the same amount of cash.
A P&I loan of $200K & 7% over 30 years = $1330.60 per month, made up of $163.95 Principal, and $1166.67 Interest.
If you took an Interest Only loan, you wouldn’t have to pay the $163.95 extra each month, which could be the difference (servicability wise) between 1 IP and 2 IPs.
This doesn’t actually stop you from paying extra into the loan if that’s what you want to do – it just has taken away the requirement.
At the end of the IO term (usually 5 years) the loan contract states that the loan will rever to P&I, however, you can ask for a further 5 years – or refinance to another lender who will offer you IO.
Cheers
MelAll that the others wrote is true Kay.
It is very much a personal choice. But remember the golden rule I mentioned above. Direct the principle of every IP loan to the PPOR if you have one.
Cheers,
Simon Macks
Mortgage Broker
http://www.mortgagehunter.com.au
0425 228 985Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
At the end of the IO term (usually 5 years) the loan contract states that the loan will rever to P&I, however, you can ask for a further 5 years – or refinance to another lender who will offer you IO.
Q.How long would it take you to pay the property of after you have paid the first 5 years of interest when it reverts to P&i.(25 years)
Q.Why would you refinance when you have paid the first 5 years in interest. For instance $1000 per month * 60 = $60,000.
Dom
[wink2]Q.How long would it take you to pay the property of after you have paid the first 5 years of interest when it reverts to P&i.(25 years)
Depends on the loan term you negotiated. If 30 years then an additional 25 years.
Q.Why would you refinance when you have paid the first 5 years in interest. For instance $1000 per month * 60 = $60,000.
Because you may get a better deal or you may wish to borrow additional funds for another project. There is no need to refinance if everything is great.
Simon Macks
Mortgage Broker
http://www.mortgagehunter.com.au
0425 228 985Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
Q.Why would you refinance when you have paid the first 5 years in interest. For instance $1000 per month * 60 = $60,000.
1. Maybe valuation on your IP is higher through another FI (beacuse of the valuer)
2. More competitive rates
3. Leverage deals through consolidation of laons with specific financiersJames
Thank you all for your replies- much appreciated
Actually, I posted those questions and then read about IO’s in the last API mag. from what you all and API have been saying, it seems the difference in the loans are absolutely minimal! Hence, I really cannot see the value in an IO loan (except for hoping for significant CG on any property one already has or might buy.
Seems we pay a lot more interest than we do principle [puke]
kay henry
Hey Kay,
its also a good idea to have a mixture of loans on your investment properties, but this will be dependant on your choice.
Cheers,
sisFrom a buy & hold strategy it would seem thai P&I would be the way to go for IP”s. [wink]
DomSome people choose IO for five years to keep the cashflow out slightly lessened until rents and wages have risen.
Purely a personal decision. No right or wrong here folks.
Simon Macks
Mortgage Broker
http://www.mortgagehunter.com.au
0425 228 985Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
No, of course there’s no rights and wrongs between IO’s and P&I’s- it’s all good
guess I have been under a misconception that there would be a substantial difference in repayments is all.the good thing I read in API is that one can make extra repayments anyway on an IO loan (another thing I didn’t know), so that one could actually make an IO loan the same repayments as a P&I, but reduce repayments to the IO level when and as needed.
Thanks for the information, folks- really appreciated- I’m learning more and more each day
kay henry
Hi Kay,
theres another catch with I/O loans and that is with most lenders you can only pay no more than $10k a year, in paying down the prinicple on top of paying down the interest repayments, though different lenders have different rules, and there are big penalties that apply if you pay more than the allocated amount in an interest only.
Cheers,
sisThanks sis
I don’t like limits on what I can repay. I like to be able to pay out properties as soon as I can. Means I can buy more etc etc
kay henry
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