Changing to IO on PPOR

[bigdealbaby]

Hey guys,

I've been lurking these forums for a while soaking up all the information and I have to say there is some excellent stuff on here.

So my situation is as follows, I am an Electrician on a modest wage of 65K with a supplied car and phone etc. I currently have 1 property which I live in and am renovating with the intention of renting out in hopefully 6-8 months time.

Through the readings I have done on here a lot of people seem to recommend changing the loan to IO if I plan on renting it out as the interest payable will be tax deductible once tenanted and am better off with the money currently going toward the principle sitting in my offset. At least this is as I understand it.


The question I have is am I not better leaving the loan as P&I so that once the renovations are completed and I have the bank evaluate my property (shooting for around 400K going of comparable sales) that more is payed off the principle and puts me in a position of more positive cash-flow to help with serviceability of future loans.

Thanks in advance.

Edit: Loan amount is 250K at 4.88% currently if that helps.

 

[Marty McDonald]

Hi bigdealbaby,

Welcome congrats on your first post!

Assuming you are suggesting paying off just a small bit of the loans principal? Like $5000-10,000? If so that won't affect how much you can borrow terribly much. You would get more borrowing power by switching to IO and taking the next loan to a lender who services other banks debts at actual repayments.

And other advantages as you have alluded to.

 

[Terry_w]

Hey guys,

I've been lurking these forums for a while soaking up all the information and I have to say there is some excellent stuff on here.

So my situation is as follows, I am an Electrician on a modest wage of 65K with a supplied car and phone etc. I currently have 1 property which I live in and am renovating with the intention of renting out in hopefully 6-8 months time.

Through the readings I have done on here a lot of people seem to recommend changing the loan to IO if I plan on renting it out as the interest payable will be tax deductible once tenanted and am better off with the money currently going toward the principle sitting in my offset. At least this is as I understand it.


The question I have is am I not better leaving the loan as P&I so that once the renovations are completed and I have the bank evaluate my property (shooting for around 400K going of comparable sales) that more is payed off the principle and puts me in a position of more positive cash-flow to help with serviceability of future loans.

Thanks in advance.

Edit: Loan amount is 250K at 4.88% currently if that helps.

No you won't be better off.

This is because your cashflow would be the same whether you used an offset account or paid it into the loan. But by paying down the loan you are trapping your cash and won't be able to access it without tax consequences. PI also means higher repayments which can hinder further borrowings and also cashflow.

 

[Shahin_Afarin]

Which lender is it?

 

[bigdealbaby]

Hi bigdealbaby,

Welcome congrats on your first post!

Assuming you are suggesting paying off just a small bit of the loans principal? Like $5000-10,000? If so that won't affect how much you can borrow terribly much. You would get more borrowing power by switching to IO and taking the next loan to a lender who services other banks debts at actual repayments.

And other advantages as you have alluded to.

Hey Marty,

Thanks for the quick reply!

Could you please explain this part to me again that I have highlighted.

Cheers.

 

[bigdealbaby]

No you won't be better off.

This is because your cashflow would be the same whether you used an offset account or paid it into the loan. But by paying down the loan you are trapping your cash and won't be able to access it without tax consequences. PI also means higher repayments which can hinder further borrowings and also cashflow.

I see, thanks Terry.

 

[bigdealbaby]

Which lender is it?

Hi Shahin,

I am currently with BankWest.

May I ask why?

Cheers.

 

[Shahin_Afarin]

Because some lenders like CBA and Westpac will allow you to easily to switches between PI and IO whereas some other lenders like NAB and Macquarie will completely reassess.

So what I'm getting at is be careful because you may change your mind about the IO to PI and may be unable to change back.

I have no idea about Bankwest's policies as I only use them only when we need to.

 

[Marty McDonald]

"taking the next loan to a lender who services other banks debts at actual repayments"

Quite a few lender will assess the repayments of other banks loans at their actual repayment which means if IO repayments then will be a lot less than if at P&I using a buffer % rate.

For example...IO versus P&I with buffer % rate
1) IO and $250,000 @ 4.88% pa = $1067 / month = actual repayment
2) P&I over 25 years and $250,000 @ 7.5% pa = $1847 / month.

So all things being equal if you take your next loan to a lender who uses method 1) as compared to method 2) you would have an extra $780 / month to service a new loan with.

 

[bigdealbaby]

Excellent, thanks guys.

 

[bigdealbaby]

Ok, so I am currently in the process if swapping to interest only which was no drama except for paying a fee of $95.

Next question would be regarding the money that I am now "saving" that was initially going off the principal.

As I am still renovating, what do you fellas think would be the best option:

1. Use the extra money to sit in my offset account to reduce my interest repayments and have there for next IP.

2. Use funds to get renovations completed sooner and extract equity.

Now I realise this is financial advice of sorts so a bit tricky but just chasing opinions at this point.

Thanks again.

 

[Marty McDonald]

start with the offset / savings and once you get a lump sum spend on the renos?

 

[bigdealbaby]

start with the offset / savings and once you get a lump sum spend on the renos?

Cheers Marty.

I already have funds allocated in my budget to reno work so it's not as if I'm relying on these new funds to compete my reno, it may just speed up the process.

Thinking I might just plod along with my current budget and keep the extra funds for next IP deposit/s.

Thanks again.

 

[albanga]

start with the offset / savings and once you get a lump sum spend on the renos?

Hey Marty,

If the plan is to turn this into an IP would he not be better with a LOC to fund the renos as the interest would then be tax deductible? (Sorry if that's silly, still trying to learn)