Benefits of Interest Only

[vmmg1992]

Would love to get some feedback from brokers, accountants or experience investors out there. So far I have been told Interest Only loans are the way to go, mainly because your paying minimal interest and you have the ability to use the funds elsewhere.

Can anyway tell me what other benefits an IO loan offers? and what exactly do people do with the extra funds? May be out of context..but is it a good idea to order a depreciation report if your house is over 50 years old?

Thanks !

 

[Aaron_C]

The main benefit is as you described. Plus you maintain the high loan balance so you get maximum negative gearing / tax benefits.

 

[vmmg1992]

maximum negative gearing / tax benefits.

What if your intention is to have a positive cash flow property? and what exactly do people usually claim during tax time in order to get maximum negative gearing benefits?

 

[Aaron_C]

Cashflow positive/negative it doesn't matter. If you pay off your loan your interest deductions get lower even though your net asset position is the same.

 

[Terry_w]

I think the main point of using an IO loan is that it frees up cashflow to pay down your non deductible debt.

 

[vmmg1992]

If you pay off your loan your interest deductions get lower even though your net asset position is the same.

That is how I originally thought, however is it worth missing out the tax benefits you receive if you keep interest payments fixed?

 

[vmmg1992]

I think the main point of using an IO loan is that it frees up cashflow to pay down your non deductible debt.

I can see how that can come in handy.. however what if you only have an IP loan?

 

[Terry_w]

I can see how that can come in handy.. however what if you only have an IP loan?

If you ever think you will buy a PPOR or upgrade a PPOR it will still be a good idea to use a IO loan and save the cash in an offset account attached as then you can use the cash for private exepenses and have the interest (indirectly) deductible.

 

[Corey Batt]

I can see how that can come in handy.. however what if you only have an IP loan?

Are you only ever going to have an IP loan? The real benefit is if you are buying a PPOR in the future (or really any non deductible purchases), otherwise you end up with situation where you have to borrow for deposit costs which is non deductible.

 

[Peter_Tersteeg]

For investment purposes, definitely go with interest only. The primary reasons as have been previously stated are that it frees up cashflow for additional investment and there's ongoing tax benefits and tax flexibility by using I/O.

There is a disadvantage however. The servicing criteria for I/O loans is actually a higher benchmark. This means that many lenders will lend less for an I/O loan as opposed to a P&I loan. With a P&I loan they assess the repayments based on P&I over 30 years. With I/O loan it's assessed as P&I over 25 years (if your I/O period is 5 years).

This shouldn't really be a problem in all but the more extreme cases and in certain circumstances it can be turned into an advantage. If you're purchasing an investment I'd suggest I/O repayments. If you're purchasing your own home and there's any chance it could be an investment later, also go with I/O.

 

[Of The Vultures]

Sorry to hijack - but once you have a P&I loan, is it possible to convert it to IO at a later stage?

 

[Singo]

Sorry to hijack - but once you have a P&I loan, is it possible to convert it to IO at a later stage?

Yes if the bank agrees. But the principle already paid is paid.

 

[Peter_Tersteeg]

Sorry to hijack - but once you have a P&I loan, is it possible to convert it to IO at a later stage?

It is possible to change to IO later, but how easy this process is depends on the lender. A few are a breeze, most are okay but a bit painful, a couple are downright awful.

 

[Srasulov]

Would love to get some feedback from brokers, accountants or experience investors out there. So far I have been told Interest Only loans are the way to go, mainly because your paying minimal interest and you have the ability to use the funds elsewhere.

Can anyway tell me what other benefits an IO loan offers? and what exactly do people do with the extra funds? May be out of context..but is it a good idea to order a depreciation report if your house is over 50 years old?

Thanks !

Hi vmmg1992,

it is important to have a flexibility to be able to use the funds for further purchases/investments, any emergencies, rate rises, maintenance issues with a property etc. If you dont have a PPOR loan, that you'd better pay off first, or any other investment that will give you a better return than what you are paying in interest for that loan, then you are better off putting your extra funds into your offset account, thus reduce the interest that you have to pay on the loan. Once you have saved up enough for your next property, then you can go investing again. However, you have to realise that it is not always better to reduce your interest as much as you can, because of the tax deductions you will get from interest expenses, but as a rule of thumb, it is better to pay less interest than use the interest as a tax deduction.
The best thing is to have a chat to your accountant, so he/she can work out which way works out better.
hope i was of help,

Kind regards,
Shaun

 

[Rolf Latham]

IO is PI at your option.

What that means is that if properly set up, your min required payment is IP, but you can pay off as much as you want via offset or other means.

For those with ok money habits, thats great and works for them.

For those with poor money habits, it wont work for them, which is why its important to realise, there is no ONE size fits all structure

ta
rolf

 

[map]

What are people's thoughts on IO loans for PPOR (with 100% offset)? I know the theory is for disciplined people this is preferable as you maintain more flexibility (i.e. payments off the principal effectively sit as savings in the offset and can be accessed at any time).

If I'm never goiong to convert my PPOR into a IP at a later date then there doesn't seem to be any disadvantage in paying interest + principal and borrowing against the capital later to fund future IPs. Happy to stand corrected though!

 

[Peter_Tersteeg]

If I'm never goiong to convert my PPOR into a IP at a later date then there doesn't seem to be any disadvantage in paying interest + principal and borrowing against the capital later to fund future IPs. Happy to stand corrected though!

If it'll never be an IP, the advantage of I/O would be that your minimum payment would be less, so your cashflow could potentially be better. Realistically though it's in your interest to pay down non deductible debt so I'd go with P&I.

 

[Rolf Latham]

If I'm never goiong to convert my PPOR into a IP at a later date then there doesn't seem to be any disadvantage in paying interest + principal and borrowing against the capital later to fund future IPs. Happy to stand corrected though!

Servicebility can be affected quite a bit with some lenders for future IPs.

We often have to do IO conversions for clients that have a few PI loans or a volume of a single PI loan

ta
rolf

 

[eXc]

It is possible to change to IO later, but how easy this process is depends on the lender. A few are a breeze, most are okay but a bit painful, a couple are downright awful.

any tips for CBA? Was looking at changing ours to IO (broker advised not to when I started, even though I wanted to...he was worried I would not be disciplined enough...he was wrong and now admits we should have done IO) but have been advised we have to pay a ~$1000 fee to refinance.

 

[Peter_Tersteeg]

If it's only up to 5 years I/O, CBA usually isn't such a big deal. There's certainly exceptions, but often they just want a simple switch request form.