hi all
can someone please explain the benefit of an interst only loan. obviously it means that your annual expenses are less but ultimately you never own the property. AND if intersts rates rise the rental requirement will soon follow
I like many others am new at all this and have dived into my investment career with a darwin house and $270k mortgage. My gut feeling is to pay it off asap and own it outright
any thoughts
i guess I have an overcautious streak
the other factor is the more capital i lay down the more CF positive this property becomes but at the expense of further purchases. its not hard to play with the numbers to fit the mouldThe benefits of an interest only loan far outweigh ever using a principal and interest loan. This comment also holds true regarding your owner occupied (PPOR) home. You have outlined the downside of never owning your property but now for the upside…
Interest only allows you to make smaller payments to control a property. This means less ongoing expense which is a huge benefit if you are investing for a capital gain. It leaves your money freed up for further investment.
On investment properties, only the interest is deductible (regarding the loan) so there is no need to pay off the principal except to reduce debt levels. This is more true for positively geared properties where you would have no deductions.
What I consider the largest benefit and the reason why I convince all my clients to set up their loans as interest only, if something goes wrong, you are only required to pay the interest and this is what the lender will be chasing you for. Your ongoing ‘commitment’ is lower.
With all the above being said, interest only loans do not prevent a borrower from paying as much as they like to reduce the principal and, thus, their ongoing interest expense. Utilisiing offset accounts or free redraw facilities also allow you to park large chunks of money in your loan which will also reduce your ongoing interest expense but also provides full access to these funds as and when you need them.
INTEREST ONLY IS THE WAY TO GO!!!
Obviously, someone who is terrible with money may not benefit from interest only but you can only please some of the people some of the time.
Robert Bou-Hamdan
Mortgage AdviserM: 0414 347 771
E: [email protected]
W: http://www.mortgagepackaging.com.auFREE Finance-Related Newsletter: See – http://www.mortgagepackaging.com.au/index_files/newsletter.htm
Comments made are of a general nature and should not be construed as individual advice.
© 2004 Mortgage Packaging Pty Ltd
Regarding your added comment about the more cash you put in, the more cashflow positive your investment becomes, consider that the more cash you put in, the less cash flow properties you can acquire as your deposit for further purchases is being eaten up buy an earlier purchase.
I believe it is all about controlling more property and gearing up properly so they are not a burden.
Robert Bou-Hamdan
Mortgage AdviserM: 0414 347 771
E: [email protected]
W: http://www.mortgagepackaging.com.auFREE Finance-Related Newsletter: See – http://www.mortgagepackaging.com.au/index_files/newsletter.htm
Comments made are of a general nature and should not be construed as individual advice.
© 2004 Mortgage Packaging Pty Ltd
Originally posted by pad1:I like many others am new at all this and have dived into my investment career with a darwin house and $270k mortgage. My gut feeling is to pay it off asap and own it outright
any thoughtsI am an I/O investor and will remain so while we have a non-deductible debt on our own home. Once this is paid off then we’ll review the I/O V P & I debate then. Bear in mind the loans will remain structured as I/O giving me the flexibility to decide how much extra, or not, I pay off.
A couple of of the critical bits of information you have been missed out – what are you attempting to do and how are you positioned for subsequent investments, if in fact, that is your plan?
Knowing your end point will largely determine what you want/need to do.
For example if you are aiming to own multiple properties and have limited savings and/or equity you would be advised to plough surplus funds into this property until you get to a stage when you have sufficient equity for subsequent purchases.
At the same time this needs to be balanced with the need to have some spare cash available so a redraw/offset account would be advisable.
While being a cautious investor is fine – you do get used to having debt attached to your name. All you need do is keep the level manageable and have resources accessible for the moments when the going gets tough.
Derek
[email protected]Property Investment Support Available. Ongoing and never stopping.
Derek’s points are good. What suits one person might not suit another, what is a good strategy for one person at a particular time in their investing cycle might not be at another time.
In my case I made an investment a few years ago with a shortterm P & I loan. The income from the property is making the payments. I can and have accessed the increased equity from the principal repayments to borrow for other property. During this property boom the increase in value far outweighs my increased equity from the payments of principal. But it’s not always going to be the same.
The principal payments also assist with interest rate risk management although obviously fixing rates does the same and probably better.
There can be an issue in P & I loans when you can start to get squeezed in cashflow because of tax, particularly if all your loans are P & I as the more payments you have made the less of your monthly payment is tax deductible as you are paying less interest.
If we think inflation is going to remain low, we are not losing a lot in the value of our money by making principal payments.
But, having said that there is obviously a lot we can learn from other members on these forums, and the way I set up the initial loan is not the way I would do it now, although from my point of view I would still have gone P & I as that helps me with my strategy.
May I ask the principal and interest loan advocates to outline one situation where setting the loan up as P&i is more beneficial than setting it up as Interest Only?
Please disregard the obvious argument that some people are bad with money.
Robert Bou-Hamdan
Mortgage AdviserM: 0414 347 771
E: [email protected]
W: http://www.mortgagepackaging.com.auFREE Finance-Related Newsletter: See – http://www.mortgagepackaging.com.au/index_files/newsletter.htm
Comments made are of a general nature and should not be construed as individual advice.
© 2004 Mortgage Packaging Pty Ltd
thank you all for the response
the concept of interest only seemed like a set up for disaster but it shows that we develop fears out of lack of information.
I still dont know which way I will go for the next property but will keep investment only a real possibility – once Im more literate in the area of course.
My short term goal is to purchase another property once my first property is completely up and running -settled, tenanted,
For the moment I will be keeping about %20 of cash in the offset account to reduce my interest repayments and help increase the equity of my investment. defensive? maybe but just a beginnerrobert
can you please eloborate on what you mean by gearing up properly
cheers
ben
my heart says that the more equity you own the safer your investment – i guess that is broad statement
benGearing up properly just refers to doing it at sustainable levels. It will look at such things as interest rate risk (increases, etc), return on investments, vacancy rates of investment properties, opportunity cost of paying of more debt rather than using funds elsewhere, etc…
Don’t just do it because it is there but because it is part of a researched plan that will improve your position.
Robert Bou-Hamdan
Mortgage AdviserM: 0414 347 771
E: [email protected]
W: http://www.mortgagepackaging.com.auFREE Finance-Related Newsletter: See – http://www.mortgagepackaging.com.au/index_files/newsletter.htm
Comments made are of a general nature and should not be construed as individual advice.
© 2004 Mortgage Packaging Pty Ltd
I know some investors that use PI loans. They realise they could be buying more by getting IO loans, but they don’t care. They want to proceed slowly and build equity by reducing hte loan as well as the capital growth.
There are even people who like to pay off one property fully before buying the next.
Terryw
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I understand that Terry. They can do the same thing with an Interest Only loan and an Offset Account and make whatever decisions they need to when their equity position is where they want it – ie: do I take the cash out of the Offset Account to buy something else and save myself the hassle of getting another loan or do I wipe out the debt by moving the money from the Offset Account to the Loan Account.
I still see not a single benefit other than choice or bad with money. I am talking about ‘FINANCIAL BENEFIT’.
Robert Bou-Hamdan
Mortgage AdviserM: 0414 347 771
E: [email protected]
W: http://www.mortgagepackaging.com.auFREE Finance-Related Newsletter: See – http://www.mortgagepackaging.com.au/index_files/newsletter.htm
Comments made are of a general nature and should not be construed as individual advice.
© 2004 Mortgage Packaging Pty Ltd
Hi Robert,
I am another newbie and this talk of interest only loans has me curious, as I alway thought that they were difficult to access.
Generally speaking who is eligible for an interest only loan?
Do you have to have equity in an existing property to leverage off?
Is an offset account a regular feature of an interest only loan these days?
Are there restrictions on property locations that are suitable. ie are IO loans not an option in truly regional areas?
Anyone else with experience in this please chip in.
cheers
heather
Originally posted by Ravtown:Hi Robert,
I am another newbie and this talk of interest only loans has me curious, as I alway thought that they were difficult to access.
Generally speaking who is eligible for an interest only loan?
Everyone who is eligible for a loan.
Do you have to have equity in an existing property to leverage off?
Only what you need to get any loan.
Is an offset account a regular feature of an interest only loan these days?
It is readily available with many products.
Are there restrictions on property locations that are suitable. ie are IO loans not an option in truly regional areas?
NO
Anyone else with experience in this please chip in.
cheers
heather
A final note, an INTEREST ONLY loan is not a separate loan. It is the same loan most people have but intead of paying principal and interest, they only pay interest. Usual terms are 5 or 10 years but these can usually be extended.
Robert Bou-Hamdan
Mortgage Adviser
http://www.mortgagepackaging.com.auFREE Finance-Related Newsletter – Click Here
Comments made are of a general nature and should not be construed as individual advice.
© 2004 Mortgage Packaging Pty Ltd
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