Another loan question



From: Gunna Doit

Hi all
I am considering purchasing my first IP on a fixed P&I loan for the first 5 years and then revert over to IO thereafter. It's a bit of a comfort zone thing. Has anyone got any thoughts on this? Does anyone know whether the finance providers are agreeable to this? Looking forward to advice.

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Reply: 1
From: Rolf Latham


Generally you will have to refinance to convert from P&I to I/O.

Why is it more comfortable to pay more than to pay less ?


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Reply: 2
From: PT Bear

Here's a strategy worth considering...

Go for IO loan (fixed or not). This keeps the costs down for a 5 year period.

After 5 years, let it go to P&I (which it will unless you refinance). At this point the rental increases should have the property happily positive, enough to cover the principal on top of the interest.

This strategy keeps you paying as little as possible over the full term of the loan. Eventually the principal gets paid as well.

Structure of loans depends on the type of property, your risk profile and what you feel comfortable with. Make sure you research this area as it can mean considerable $$ and stress if you don't.

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Reply: 2.1
From: Gunna Doit

Thanks Rolf & PT Bear for your valuable advice.
I'm thinking that I would feel more comfortable having paid off a few thousand on the principal before converting it over to IO. I plan to purchase an IP where the rent more than covers the expenses, thus leaving some money over to go towards the principal. Just a thought at the moment.
Thanks PT Bear for your strategy. It also sounds like an effective one and one that I hadn't even thought of.
So many choices, so much thinking!!!
Your advice is really appreciated.
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Reply: 2.1.1
From: Aaron Dwyer

If your in a position to put some principle into the loan then just get an IO loan from a provider that allows you pay some of the principle back without penalty.

I know BoQ allows 5,000 in extra payments on top of interest only per annum. Anything over that and you pay penalties.

Just another option.
Aaron Dwyer
~ To know and not to do, is really not to know at all.
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From: Les .

G'day Gunna,

My thoughts would be to put the difference between P&I and IO into an Offset account (take an IO loan initially). This way, you are getting the SAME benefit as paying P&I, and, if you think the same way after 5 years, then simply use the Offset account's $$ to pay down the mortgage as it reverts to P&I.

The major problem with P&I is that it takes nearly $200 (before Tax) to pay down $100 off your principal. And at the end of 5 years, it is quite likely that your property is worth 60% more than you paid anyway. Thus you owe only HALF of the value of the property - why give them back more, if the extra $$ per week can be funding IP#2 ?????

Another thing worth considering is that a P&I payment is considerably larger than IO while Interest Rates are low. With Rates low, you could be paying 30% more for P&I than for IO - depends on the term of the loan, of course. Run the numbers, Gunna - and see just what you would be contributing each week vs IO.

But it IS a personal decision, and we each choose our own "mix" - you would not be alone if you wanted to go P&I.

Jan says it good - "I spend far more time arranging my finances than in selecting property" - (sorry, Jan, it's not verbatim - just how I remember it ;^) Spend a fair bit of time "crunching the numbers", Gunna - then act with those you feel comfortable with.



- "Eschew Obfuscation" - ;^)
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Reply: 3
From: Russell Chellew

Hi Gunna

Another finance option is apply for Equity/Line of credit and set up P & I repayments for 1st 5 years from a nominated account or alternatively pay your salary & rental income into the line of credit which will reduce loan quicker during the 1st 5 years. You can then reset repayments at interest only without having to refinance after 5 years.


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Reply: 3.1
From: Sim' Hampel

Russell, my opinion about your suggestion of a LOC for an IP with salary and rent paid into it is that while technically quite reasonable - it is a dangerous game to play from a taxation point of view.

As you suggest paying your salary into the LOC to reduce interest, this implies that you will need to redraw some money for personal expenses. The interest on money redrawn from the LOC for personal use will NOT be tax deductible, and indeed can get rather complex to work out what you can legitimately claim.

LOCs are great for owner occupied property (unless you will turn it into an IP at some stage). Personally, an offset account works infinitely better than a LOC with both P&I and IO loans and for both IP and owner occ properties.

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