Any benefits of interest only? (on low income)

Firstly, I'm on a fairly low income (low 30000s), and let's just assume this won't change for a while.:eek:

I get the idea that most people say IO loans are the way to go for an investment property. But am I correct in thinking the main advantage to interest only is that the interest payments are tax deductible while the principle payments are not?

So if I'm not paying that much tax is it really worth getting an IO loan?

Disadvantages of IO in my situation may be that it's harder to get a loan (banks prefer P&I?) and (correct me if this is wrong) you have to pay to refinance every 5 years or so if you want to keep the IO.

I'd really appreciate any advice. Thanks :)
 
Some people get I/O loans so that their cash flow is better, as you are only paying interest you have more cash to spend and so some investor's will use the extra cash flow to fund further investments.

A lot of lenders will allow you to have I/O for 5 years and so you might then need to refinance.
 
the benefits of IO are somewhat independant of your income. for tax purposes if there is any chance you will want to turn the property from a PPOR to an IP in the future, then IO is the way to go.

but IO shouldnt be seen as a way to get a home loan you cant afford. and banks wont lend anyway unless you could make the payments of a P&I loan.

the typical scenario of benefit of IO/offset loan may be purchase of an PPOR, then upgrade to new PPOR and turn original into IP. if you have an IO/offset loan, you move all the money in the offset account to an offset account against your PPOR (reducing non-deductible debt) and your now IP shoots back up to full IO interest charges that are fully deductible.

some people will do it the 'wrong' way and fully or partially pay off their PPOR and then decide theyd like to turn it into an IP later on - by then its too late (although there are some ways around it depending on circumstances but its not pretty)
 
Put simply

IO gives YOU choice to pay principal

P&I doesnt

Dunna matter if you earn 250 k or 10 k a year

Sometimes that little choice can make the difference between being able to hold on to get through a hard time , or being foreclosed on.

ta
rolf
 
Agree with Rolf here.

IO gives you options.

Attaching to an offset account is better as this gives more options down the track.

If you are doing well, put more money in your offset / loan.

If times get tougher, you can revert back to the interest only amount.
 
Firstly, I'm on a fairly low income (low 30000s), and let's just assume this won't change for a while.:eek:

Marmalade, check out the results of this poll:
http://www.somersoft.com/forums/poll.php?do=showresults&pollid=698

You will notice that the mean income admitted to is about four time yours.

This strongly influences the style and outcome of investing. By this I mean tax implications are very important, and that without those tax breaks resi investing would not be as popular with these high earners.

Like you I have always had a modest income, and while I own property, I have never thought of it as a "one size fits all" proposition and have made myself unpopular here because I have voiced caution in RE investing. You should discount much of the opinions stated here as not being particularly suitable to you, personally.

I have never had an "interest only" account. I go for the cheapest, simplest variable on P&I I can get.
 
Sunfish, I respect your own strategy and entitlement to your opinion.

I am unsure if paying off an investment debt on a P&I basis is a preferable option.

Your argument is that there is less benefit, so you shouldn't take advantage of the maximum benefits available.

I would argue that an offset account attached to the loan would be a better option for surplus funds, rather than a P&I basis.

This is particulary true if non-deductible debt exists.

You should discount much of the opinions stated here as not being particularly suitable to you, personally.

I think you need to quantify why you don't think the opinions we have provided are suitable? Do you have alternative options that work better for the OP ?
 
Hiya Sunfish

Assuming that one borrows to their cashflow limit, a PI structure as proposed, and preferred by some, has a higher risk of default and subsequent foreclosure than an IO with the PI repayments parked in the offset account. The longer the loan runs for, the greater the risk mitigation with the IO option.

Thems the facts, everything else is personal preference, unless a client doesnt have the monetary control to operate a savings account with cash in it.

As for pricing, there is some argument there, but a 250 k IO offset loan under pro pack is priced about "the same" as a plain Jane PI. If that makes the difference between a sucess and failure, then the margin on the investment is way to skinny in the first place. This can be different on a < 150 k loan though where the pro packs tend not to be effective.

ta
rolf
 
We're on a low income (taxable anyway) and the best thing about IO is we have lots of spare money we can save to do silly things like pay tens of thousands of dollars of fees cash without needing bank loans. Because bank loans are hard to get on a low income so saving $500 a week is easier ...
 
Have to agree with most of the above.

IO = More choice. Set an Offset up and pay extra into the Offset.

I respect Sunfish's opinion as that strategy obviously works for him.

Perhaps it is better to ask marmalade what his/her strategy is and if he/she is wanting to accumulate a large portfolio of property. Is the strategy NG, Positve or Neutral and what marmalade's risk profile is.

I think these questions are more important than what marmalade's actual income is. It's all in the strategy.

Low Income, high income, it all comes down to control and cashflow.

Regards JO
 
Thanks for all the posts, I am much more enlightened now! After reading this and other threads, I am leaning towards IO. Offset accounts also sound pretty fantastic, I like the idea of having more control of your cash.

In response to josko: yes, I would like to end up with a portfolio of property (enough to live off eventually), I can take a fair bit of risk if necessary and I'm aiming for neutral to positive gearing, although I would take a more neutral property over a positive one if there was a higher likelihood of capital growth. My strategy is a work in progress!

I have another question too: Are lenders less likely to approve an application if it's for an IO loan instead of P&I?
 
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