I am investing in Income Properties (ie, buy apartments to rent out).
If given the option, would it be better to take a 30 year loan or 20 year loan? Currently interest rates are low so i can get BLR – 2%
Here are my thinking:
I am 40 now, and I am thinking of retiring at 60, so taking a 20 year loan would make sense as all my properties would be fully paid off. If I took 30 years, then I'll have to wait till I am 70.
On the other hand, taking 30 year loans means my monthly repayment is much lower, which means i have far more tolerance in rental returns (for example, if interest rates goes up, or if rents goes down, I could still be able to cover the payments). Also, my ability to buy more properties.
So, what do you guys think?
Have you considered an interest only with offset account option?
If you are committed to your aim of owning the properties outright and using the timelines you have mention I would take my loans for a 30 year period but make payments as if it were a 20 year loan. This means you can reduce your monthly repays if you fall on harder times.
Hi Derek,
That makes sense. With the 30 year period, I have more flexibility.
Can you explain more about the interest only? Not sure I understand. Would it mean, I just pay interest and then after 20 years, I still have a loan to pay off?
Interest only loans are commonly used in Australia by property investors – there are also a growing number of homeowners using interest only loans too.
We tend to use Interest only loans as the monthly interest bill is deductible and in the early years a properties rent return is generally at its lowest point. In effect you are paying the least when the rent is at its lowest.
The loan is taken out over 25/30 years with the Interest only period generally limited to a 5/10 year time frames – I do believe a couple of lenders will look at 15 yr interest only periods. At the end of the interest only period it is expected that you resume principle and interest payments at such a rate that your loan is paid off in the 25/30 year time frame established in the initial contract.
Ah, I see… interesting. Looks like Australia is way ahead of the curve in terms of income property investments.
The banks here don't know much about income property investments and don't have too many products in terms of loans. Each loan is a basic mortgage loan.
Also, I tend to find properties where the rental return can pay off each month's repayment.
Where are you buying CG?
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Malaysia
Oh well cant add and value to the conversation over there.
Terry W has property in Japan and maybe able to advise further.
Coming from the UK I know you can't even pay fortnight with most lenders so offset accounts are still a thing in the future.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Nice post. It is really hard to decide when financial loans are being discussed. I guess, it would be better to take the option which you like most. I agree with Derek, by paying your loan as if it is a 20 year period even its really 30 year period, would give you a chance to have your way.
I would personally go with 20 years. I do not like repaying for something for long. Always try to pay a loan before a due date.
Go long as possible because you can always pay it off early by making higher repayments or lump sums. If things get tight then you acn reduce your repauyments. If you are paying on a shorter term you don't have the same flexibility.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Totally agree with Terry.
The other benefit to this approach is that the lower repayments associated with a longer term will make your future borrowing capacity higher – particularly for lenders that go off the actual repayments for existing liabilities and don't add an "assessment rate" which is your current repayment loaded by an additional 2% (give or take).
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
One big advantage of an IO loan is that in a rising market, come the end of the loan period if you sold only a small portion of the portfolio, the entire loan portfolio could be paid off. Also time effect of money means that in 20 years if you borrowed $1m today it would only be the equivalent (in today's $ of say $234k (@ 7%) when you come to pay it out in 20 years (or $115k in 30 years).
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