All Topics / General Property / What’s interest only advantage?

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  • Profile photo of PeterCavPeterCav
    Join Date: 2005
    Post Count: 9

    First time investor here. What’s the advantage of interest only loans. I plan on buyig a property and keeping it long term. 10yrs+

    Is there an advantage going interest only?


    Profile photo of xenaxena
    Join Date: 2005
    Post Count: 12

    If it is an investment property (I am presuming it is), all the interest is deductable.
    A PI loan, only the interest portion is deductable.

    An IO loan will free up cashflow to buy more properties.

    It depends on your individual circumstances and future plans what loan is best for you.

    Profile photo of Mobile MortgageMobile Mortgage
    Join Date: 2003
    Post Count: 913

    Also, a lot of I.O products have no limitations on the amount of extra loan repayments, hence more choice/flexibility.
    But as Xena mentioned, everyone’s circumstances & long/short term goals are different, cheers.

    Steven Crane
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    PLEASE note comments made should not be taken as specific taxation, financial, legal or investment advice.

    Profile photo of westanwestan
    Join Date: 2002
    Post Count: 1,950

    Hi Peter

    this is the way i see it

    with a P&I loan at the end of the 10 years you will end up with a smaller loan, and own more of the home than if you had an Int. only loan. This is obvious because over 10 years you would have been paying part of the principal each month.

    Which is best ?
    it comes down to what are you planning to do with that small amount of money you have left over each month (as an Int only you will pay less each month). If you end up spending it each week on your lifestyle then thats not good financial management but if you use that money to invest then thats good management. if you think that you can invest that money in stocks etc and make a better return than the interest rates you are paying on the loan then good, or if you use this money to pay off any non deductable debt (ie family home or credit cards) then good also.

    sorry its a bit confusing , hope you follow me. At the end of the day, i’d always choise interest only as i believe i can invest the money at a higher return than the interest rates on the loan.

    regards westan

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    Profile photo of Nigel KibelNigel Kibel
    Join Date: 2005
    Post Count: 1,425

    If you are purchasing a property that will have high capital growth then an interest only loan will assist you with you cashflow and help you acquire more property

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    Profile photo of AUSPROPAUSPROP
    Join Date: 2003
    Post Count: 953

    Exactly – cap growth inthe property will make the small amount of principal reduction on your loan seem small in comparison. The aim would be to reduce your payments to as little as possible to free up your cashflow in order to fund further investment. If cap growth rates take a breather in a few years time you could then look at consolidating and then possibly attacking the principal amount (which inflation will have already done a good job of anyway!).

    John Carroll

    Profile photo of ez-rentez-rent
    Join Date: 2003
    Post Count: 139

    Mind you, if your property is close to breakeven cashflow, then you will make some very serious dents into your principal in that time if you do choose to pay principal.

    In a period of less than spectacular capital gains going forward, its probably a sound strategy?

    But one of TMA’s post finally clicked for me.. I assume that this is a scenario where TMA and others would have the poster consider an offset against an IO Loan (which I’m sure I read is doable?) As that way you can still pay down the principal while you do not need the cash for other purposes, yet have access to it later if you need it without ATO issues?

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    Profile photo of Robbie BRobbie B
    Join Date: 2004
    Post Count: 2,493

    That’s right EZ!!! It is very common to have interest only loans with offset.

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