P&I or IO?

Hey guys,

So question is, I'm going to live in a house soon for six months, which after then I will rent out. Now, is it better while I'm living there to pay P&I or simply IO? Once I move out, same principle, P&I or IO?

I'm wanting to get equity to get a second house and I do not know which will be the better route.

Details:

House : $317500
Loan : $260000
Salary : $38100

P&I Repayments: $360~
IO Repayments: $260~

Thanks guys...

Can you please explain it to me as if I know nothing - Because I don't

There's two ways to look at this IO or P&I thing: my way and the wrong way

Scenario: IO loan and assume RE doubles every 10 years (conservatively)
Year 1: Buy IP for $400K with 80% loan of $320K on IO so equity = $80K
Year 10: IP worth $800K, loan still $320K, equity now $480K
Year 20: IP worth $1.6M, loan still $320K, equity $1.3M
Year 30: IP worth $3.2M, loan still $320K, equity $2.9M

Please tell me how, even using your best efforts paying off loan principal you can come anywhere near the equity that GC of the IP is doing. They probably exist, but I've never met anybody who has saved $2.82 Million in 30 years.

I just don't get this "pay off your principal so you ceate equity thing". All you are talking about is some forced tax-advantaged savings plan.

IMO just use cash flow to service more IO debt on IPs to get the equity generator thing happening 2 fold or 3 fold or as many IPs as you can afford.

At the end of the day if CG is not happening in RE then saving your way to wealth through paying off loan principal is not going to cut it for you.

Infest said:

So question is, I'm going to live in a house soon for six months, which after then I will rent out. Now, is it better while I'm living there to pay P&I or simply IO? Once I move out, same principle, P&I or IO?
Details:
P&I Repayments: $360~
IO Repayments: $260~

Click to expand...

Based on my previous post you probably know where this is heading.

So in your case, your question is:
Do I pay down $100 per week over 6 months to create, wait for it, a massive $2,600 of equity?

Sure, why not, knock yourself out.

I tend to lean towards the argument of I/O for IPs, based on the advantage of the additional cashflow. If you want to make extra repayments, you've usually go the ability to do so, but if you need the cashflow or to make only minimal repayments, you can do that too.

On the other hand, paying off your loan does make some people more comfortable so I'm not against that either.

I'd suggest that you start with the loan structure you want to end up with. It's easy to go from I/O to P&I but the reverse isn't always true.

Many lenders require a reassessment of the loan when going from P&I to I/O. This may require a new valuation and effectively a refinance. Policies which existing for new purchases often do not apply to refinances so it may not be possible to reassess the loan in extreme circumstances.

IO IO IO its off to work we go.

I cant think of any advantage for anyone to have a PI loan unless they arent good with managing their spare cash in which case a PI loan will be better suited

ta
rolf

Rolf Latham said:

IO IO IO its off to work we go.

I cant think of any advantage for anyone to have a PI loan unless they arent good with managing their spare cash in which case a PI loan will be better suited

ta
rolf

Click to expand...

And unfortunately Rolf, this is where I am finding myself...having a heap of problems deciding what to do with my cash. I want to buy more IPs, but what will happen if IR suddenly increase and eat up my spare cash flow??? A jump to 8-9% would mean I would need to almost sell if I buy one more IP now... so what would I do with my cash? Like you said, paying off PI loan seems the only solution for a scary cat like me....

Hiya

I think you are mixing 2 different risks here.

Rate risk, which you can moderate to some extent by simply fixing your loans.

So if you want to buy a place and the ONLY risk that you percieve will be an issue for you, then simply fix the loan now at 6 ish or so and be done with it ?

Makes sense, but Im sure its not that obvious.

ta
rolf

Rolf Latham said:

IO IO IO its off to work we go.

I cant think of any advantage for anyone to have a PI loan unless they arent good with managing their spare cash in which case a PI loan will be better suited

ta
rolf

Click to expand...

OR I owe I owe I owe it's off to work I go

Sorry Rolf, I'm bored; kinda like the kids in the car.....but in our case, "can we buy yet, can we buy yet?"

Do investors however keep their main residence IO as well? I am confused about whether I should buy down the PPOR or use that money to acquire more property. The PPOR mortage is still high and I would like it to be lower. Do i focus on paying it down untill it reaches comfortable level or just IO and buy IP instead?

tigerGT said:

Do investors however keep their main residence IO as well?

Click to expand...

Personally I do - for the reasons above. But I'm only one investor.

tigerGT said:

I am confused about whether I should buy down the PPOR or use that money to acquire more property.

Click to expand...

Only you can answer that & it relates to risk profile, SANF, your view on the market, leverage etc.

tigerGT said:

The PPOR mortage is still high and I would like it to be lower.

Click to expand...

Well it is up to you.

tigerGT said:

Do i focus on paying it down untill it reaches comfortable level or just IO and buy IP instead?

Click to expand...

Same answer. You sound like you want to be comfortable. Others can stand un-comfortable and take a higher risk. Only you can decide.

Thanks Propertunity. Such uncertanty out there. I wish the government would either remove the deadline or advise what they want to do. That way I would know if what is happening is a result of market conditions or government trying to "lure" FHB at a time that is not recommended.

Hi Tiger

If you keep your PPOR on IO, and have a 100 % offset account yu get the best of both worlds .

Pay the principal into the offset and voila, a PI loan at your option.

On the other hand, if you arent good with money...............then PI is usually better, since it forces debt reduction.

ta
rolf

I agree. My PPOR is on an IO loan. I have a spreadsheet that tracks my offset balance every month and compares it to how I am doing as if I had a P&I loan. The good thing is that, the money is not locked away as in a P&I loan, but sitting in my offset acc.

Huya Au

Its good for about 3 put of 5 people

for 2 out of 5 the offset account balance gets spent ...............

Fortunately, we can usually help to identify those people to themselves.

ta
rolf

Good point Rolf. Well hubby & I saved about 80% of our salaries for our PPOR (practically ate like uni students... home brand milk, discounted meat at 10pm!!) so we knew we'd be pretty disciplined re: the offset. Now our next goal is to save up enough deposit for our first IP so I'm watching that offset balance like a hawk

Quick question with regards to IO loans and offset accounts...

After the IO period, for example 10years, can you extend the IO period?
Does this mean you would have to refinance?
Can this only be done if the loan was variable?
Any costs?
Is it a relatively easy process?

And with offset accounts, is the entire offset amount used to calculate the interest i.e:

Interest Amount = Interest Rate * (Outstanding loan balance - Offset account balance)

Thanks

Your calculation has the correct principle, but I think the banks calculate interest DAILY rather than at the end of the month. So they look at the offset balance every day to calculate interest.

And yes you can reapply to extend your IO period.

Hiya

Most lenders will allow an IO period to be renewed.

Often this will require a refinance.

IO with offset is generally limited to variable, though a handful of lenders do do 100 % IO offset on their fixeds. It can often be worked around by using a cocktail of fixed and variable loans.

Costs..........very likely, but probably worth less than a decent coffee a month over the 10 years, so not a consideration.

yes, true 100 % offset accts work exactly like you decribe .

ta
rolf

to the newbies

Why kill yourself to pay off the principle when your loan will be eaten by inflation over time. Inflation is your friend


For example
You took out a $10 K loan for a property that you bought back in 1970.
$10 K was a *ell of a lot of money back then but today its peanuts.

Nearly 40 years later if you have only being paying IO all that time, your property would have increased in value yet your loan is still $10 K. Wait till your loan has been eaten away by inflation then pay it off. How easy would it be, how quick would it be to pay that off now!!


Put your money in the offset account. You'll have a lot more cashflow (more money to invest) when you go IO, because you are not paying off any principle and you'll be able to accumulate properties faster. I sure know what i would love to have.

I would rather have 2 ips and my 1 ppor under my belt when I ride Perth's next wave thanks very much. I wouldnt be able to do it if I went gang busters at paying off my ppor. If it takes me a good 7 years of hard slog to pay off my ppor mortgage the opportunity cost is huge to me. (Not to mention your paying in after tax dollars which makes it even harder). By the time my ppor would be paid off there would be a whole new cycle.

It means I would have missed the opportunity to invest in the 2 more properties. I would only have the 1 property when riding the next wave. I want 3 properties I'm looking at the bigger picture!!


Oh and one more thing. You dont always have to pay off the principle to build your equity up, you can build your equity up in your offset account. It is just in a different location. Its not inside the loan itself. Its handy in that the more savings you have in their the less you pay on your loan. You can pull out money when needing it for deposits, expenses.


I hope I havent rambled on too much, its very late here. If you guys are still confused about all this, just keep reading a lot. You'll find heaps of topics about it here.

I do the IO thing on all of our ppor and ip it gives better cash flow and allows me to use the differance in IO & PI to add value to increse rents & or capital gains faster.
if your savings add to $5,400 a year thats a nice kitchen upgrade if your clever?