I will soon be refinancing my two IO investment properties from the CBA (6.66%) to the NAB (6.49% with an offset account). Further down the track I want to buy another investment property, but in the meantime my main aim is to reduce my debt.
I only earn $48k and I salary sacrafice so that at the end of the financial year I only end up paying just over $3.5k in PAYG tax. This is my current situation;
Valued at $500k
Rent $1600 pm
Valued at $300k
Rent $954 pm
I've always held these two investment properties as interest only and prior to my current job I was on $70k (with no salary sacrafice option) so negative gearing was highly effective. I've been told that I can also have these properties as P+I at 6.49% with an offest account. Seeing as I want to reduce debt faster (I know this flies in the face of nearly every property investor) should I therefore hold them as P+I? I would still be paying a fair bit of interest on P+I for a while so I would still be able to claim tax deductions from the $3,500 odd tax I pay currently. Also apart from having the offset, I intend to continue to contribute as much as I can in extra repayments when I can.
Can someone see the flaws in what I am thinking by doing it this way with a P+I loan and/or would I really be better to stay IO. I realise I can only claim the interest component of the loan but I'm aware that I'm just not paying that much tax? Many thanks in advance!
You don't say if you have any undeductible debt – if you do you should be paying this down first instead of investment loans.
Assuming you don't, then you could use PI, but I would still suggest IO as you can save up the funds in the offset and end up paying the same interest. You also have the option of paying extra on the loans, like PI or even more, but then have the option of reducing the payments if you run into some cashflow problems unexpectedly.
Thanks for your reply. I don't have any undeductible debt (as in PPOR mortgage, etc). I would have thought that seeing that the P+I rate is the same as the IO rate (both with an offset account) at 6.49% then if I went P+I I'd have to be paying more off the debt? If I've got this wrong please feel free to point me out. Many thanks again!
Gatsby.CatalystParticipant@catalystJoin Date: 2008Post Count: 1,404
Question? Why are the rents so low? 3.8%.
Lucky you have paid down your loans otherwise that's seriously cash flow negative.
Why are you waiting to buy another? You only have 50% LVR.
Put the rents up and buy again.
By paying PI you would be paying more off the debt, but you can achieve this with IO by paying extra too. You then have the flexibility to reduce the repayments if need be.
But if you have no other debt, then PI should be fine. What ever suits your personality.
Thanks Terry. I started thinking that if the P+I rate they are offering me is the same as the IO rate then if I go P+I, I'm already paying down some debt. Therefore I thought that instead of going IO and making additional payments, if I go P+I and make additional payments then I would be even more ahead in debt reduction. I've commenced the switch from the CBA (today was just another reason to!) to NAB.
Catalyst, thanks for your input. I will reassess if the rent being charged is market rate.