All Topics / Finance / Downside of repaying IP Principal?

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  • Profile photo of HoppyMHoppyM
    Participant
    @hoppym
    Join Date: 2015
    Post Count: 2

    Hey Guys,

    What’s the downside of repaying IP principal back early?

    We have 7 IP’s all on P&I mortgages with 4 of the 7 with 100% full offsets. IP’s are positively geared. We also save a substantial amount from our salaries each month too.

    I know this is a conservative low risk option at the moment, but we re waiting to see if/what the post COVID economic fallout is before contemplating the next step(s)

    Is there a downside to paying back the IP Principal in the interim or better to continue saving?

    Any feedback would be greatly appreciated. Thanks.

    Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,416

    Hi HoppyM,

      Is there a downside to paying back the IP Principal in the interim or better to continue saving?

    Sounds like you are in good shape !!   Well done.   Re “paying back IP principal”, it sounds like you are already set up to do just that.

    Or, are you considering moving any extra savings in the Offsets to pay down the mortgages even more?  See, that latter move (to me) would not do you any good – in fact, could do quite the opposite.  Simply put, your Offsets are already minimising any Interest paid (as if the money HAS come off the Principal amount owing) and yet that money in Offset is YOURS to keep, and it can be removed at a moment’s notice.  This can be very useful if you have the “deal of a lifetime come your way” (or an emergency) and you need cash NOW.   So by keeping it in the Offset, you get the best of both worlds.

    To me “Saving in your Offset” makes a lot of sense.   One thing I’d suggest though is to look at moving all Offset monies to be against ONE property (simply because this can be against the mortgage with the highest interest rate, AND it means being able to remove a LARGE chunk of change with one transaction when needed).   It is all about staying flexible in my eyes.

    Let’s see what others think too…..  ;)

    Benny

    Profile photo of HoppyMHoppyM
    Participant
    @hoppym
    Join Date: 2015
    Post Count: 2

    Thanks for getting back to me Benny.

    I know all the current repayments against those 4 are paying down only the Principal, but didn’t know if putting more savings to pay down the principal even quicker was worthwhile or what the downside was of this strategy? Are there tax implications if we do or decide to get a LOC down the line?

    I probably wasn’t good at explaining it but with the offsets we have them filled to the entire value of the Principal amount for each property. We do like the flexibility this offers too.

    Perhaps it’s a good time to just save a cash contingency in the meantime?. Are we being too conservative in our approach at this time? What are others takes on the economic fallout potential for COVID and how is it impacting your strategy at the current time?

     

    • This reply was modified 6 months, 3 weeks ago by Profile photo of HoppyM HoppyM.
    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    I guess the down sides are:

    a) Tax – what if you need the money to buy a kidney or fly around the world?

    You might be able to borrow, but the interest won’t be deductible.

    b) risk

    What if the worst happens, and you have a cash flow crisis?

    c) retirement

    Retirement could be delayed if your rents are not enough

     

    d) Helping kids

    What if you wanted to help one of your kids into a house – you could interest free lend them and claim the interest on your investment loans giving you great deductions and save you tax while helping them.

     

    etc

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    https://terryw.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

    Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,416

    Hi Hoppy,

    Wow, your are doing way better than I first thought (and I was impressed then!!)

    …..with the offsets we have them filled to the entire value of the Principal amount for each property

    So your total P&I payments are paying down the principal amounts, eh?  How cool.  Based on that, and after hearing Terryw’s thoughts re tax on further loans perhaps being non-deductable, it seems to me you are better to keep going as you are.

    Other thoughts I have relate to “where to from here” and our economies.  There has been a huge cash injection in all major countries – think Jobkeeper, Jobseeker, etc but similar in USA, UK, etc.   So lots more money printed, all looking for a home, leads to inflation.  Thus we are seeing banks and other finance gurus (who had first thought Covid would send our property market into a tailspin) now seeing property values surge i.e. people pay a higher price for the same object = inflation.

    So, (at least for now), doesn’t that mean that cash in the bank is doomed to lose value?   i.e. is it better to own assets than to keep large amounts in a bank?   And properties (at least for now) are headed for a rise in “value” in dollar terms?   Is another investment a better option?   And hey, I certainly don’t have the answers Hoppy – I simply put my thoughts out there like a coconut shy (for others to have a shot at, as I’m sure there is FAR MORE to the current situation than I am seeing…..)

    Anyway to you, SO well done !!   Keep on,  ;)

    Benny

    • This reply was modified 6 months, 3 weeks ago by Profile photo of Benny Benny. Reason: Making the quote work - for clarity
    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    e) You may not be able to borrow in the future

    keeping the cash in the offset accounts saves you interest but also makes that cash available for future investments too. If you paid a loan down and could not borrow any more you won’t be able to invest like you could if you hadn’t paid the loan down.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    https://terryw.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

    Profile photo of Steve McKnightSteve McKnight
    Keymaster
    @stevemcknight
    Join Date: 2001
    Post Count: 1,763

    G’day,

    My contribution to the discussion is via some investing principles that I have seen work time and time again:

    1. The goal of getting into debt, is to get out of debt. That is, if you owned a portfolio of debt-free income producing assets then you would be somewhat inoculated against rises in interest rates, plus if you had to borrow in a hurry you would have borrowing ability based on serviceability generated from the assets. If you need to get into debt as a precursor to getting out of debt, then just make sure you have a plan for how you will service and repay the loan.

    2. Better to have it and not need it, than need it and not have it. For this reason, repaying a loan and not being able to borrow it back seems a ‘less good’ option than having an offset account that you can access at call and does the same thing as repaying it. That said, consider the cost and terms of such an offset facility, as they are rarely free.

    3. Money supply is more important than money cost. People are trying to save a penny here and there when being able to access finance is much more important. The borrowing rule is this: your asset’s net income return (NOI / cap rate) must be higher than the cost of finance (interest/rate of interest). If not, then you will be leaking cashflow that will need to be plugged from another source.

    4. You bank dollars, not percentages. Be more worried about your worth based on what’s in your bank account as opposed to what is on your net-worth spreadsheet (that includes unrealised gains). Beware being asset rich and cashflow poor, as this often leads to “poor wealthy”, which is people who seem to have wealth but no way of accessing it (as opposed to “wealthy poor”, who have the signs but not the substance of wealth).

    And a shout out to Terry & Benny… thanks for your good contributions.

    – Steve

     

    Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
    https://www.propertyinvesting.com

    Success comes from doing things differently

    Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,416

    Hi Hoppy,

    After reading the other replies and thinking further about your excellent situation, I’m wondering if it might be beneficial to pay out one or two of the seven IPs.  I’m thinking there of keeping flexible ahead of possible troubled times.  e.g. Have you heard about “bail in laws” that I’ve been hearing about for about a year now – where banks may simply “take” your money if they run into trouble.    Will things get to that?  I don’t know, but then I hadn’t considered ever seeing Interest Rates at all-time lows either….

    So, maybe there is some merit in choosing one or two of those IP’s that you would plan to keep over the long term (perhaps the location is likely to see better Capital Growth than others, or perhaps their return is higher than others) and use their Offset money to pay them off completely.  That means you can then retain them despite any adverse future financial situations that might arise.  It also provides diversity of your financial position too.  The Banks could not “bail in the cash from those Offsets” if it’s been used to pay off the house and the IP is now YOURS.

    Interesting points from Steve too – you get into debt to get out of it, but also an alternative thought that it is better to have cash and not need it.  i.e. you have CHOICE – do you pay some off and keep the cash in the Offsets of all the others?   If so, which ones, and how many of them do you pay off?   Like two bob each way eh?   Can’t be bad, and your situation leaves you open to making your really good position even more secure.

    Benny

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