"Cheapest" loan, IO split?

[want2bewealthy]

Hi yall,

I went over my investment IO loan today and came up with an idea,
My biggest goal when investing [even know this is my first time] is to save every penny I can, wherever I can and this should stand true for all of us too.

I have a split loan where about 80% is wound up in a fixed rate and 20% in a variable rate, Ive done this because I can make extra repayments with no penalty to drop my interest and because of the redraw facility if I ever need it.
Also, as I understand, whatever money I put into this variable percentage of the loan, the money is all still mine, It doesnt "go" anywhere it just drops your repayments and is easily withdrawed from the loan, back into your own pocket.
This is an atractive aspect of the variable rate.

I have $40.000.00 in that variable category and am wondering if I should up it to around 60-70.000.00, I say this because, If I make the extra repayment each week, I will effectively drop my interest by the most.
Plus, the extra .25% on that variable percentage of the loan makes hardly any difference to the loan repayments anyway.

Am I on to something here? do you guys already do this?
Am I living in the stone age?..

 

[alexlee]

Might I suggest an offset account instead? Max flexibility.
Alex

 

[JTY]

Per Alexlee, I am also a fan of 100% offset accounts. Redraws are OK but 100% Offsets give much more flexibility.
In respects to whether to up the variable proportion of your loan, your idea would work under current interest rates. The .25% isn't much.
BUT what if the variable rate went up further and the difference between the fixed and variable rates gets larger ? Would you then be stuck with a larger proportion in the variable rate that isn't compensated for by the lower balance ?

 

[The Y-man]

Am I on to something here? do you guys already do this?
Am I living in the stone age?..

Just be careful what you do with the money you redraw. If you use the money for "non-income producing use" (as seen by the ATO), the interest on that portion of your loan will no longer be tax deductable.

Cheers,

The Y-man

 

[Medine]

Hi yall,
I went over my investment IO loan today and came up with an idea,
My biggest goal when investing [even know this is my first time] is to save every penny I can,......

Hi Want2bewealthy,

I'm wondering why you think that your biggest goal is to save every penny? It's more usual to hear that people want to retire by a certain time, or create a certain amount of wealth or another such future goal?

Cheers, Medine

 

[want2bewealthy]

Hi Want2bewealthy,

I'm wondering why you think that your biggest goal is to save every penny? It's more usual to hear that people want to retire by a certain time, or create a certain amount of wealth or another such future goal?

Cheers, Medine

Well, put it this way,
If I took out a loan that wasnt in my best interests financially such as bank A's 7.55%PA, as opposed to bank B's 7.35%PA,
I would be saving a substantial amout over the term of the loan, it's logic isnt it?
This would mean, as you stated, I would have more money and therefore be richer than I otherwise would had if I had went for the higher interest loan.

Another way of putting it is, shop A, has a stove for $565.00, store B has the same stove for $489.00, Id be richer ;]
To me, your loan makes a huge difference in your wealth over many years, it's fact.

Meaning, Id be richer when I retire in another 40 years.

 

[alexlee]

Well, put it this way,
If I took out a loan that wasnt in my best interests financially such as bank A's 7.55%PA, as opposed to bank B's 7.35%PA,
I would be saving a substantial amout over the term of the loan, it's logic isnt it?
This would mean, as you stated, I would have more money and therefore be richer than I otherwise would had if I had went for the higher interest loan.

Another way of putting it is, shop A, has a stove for $565.00, store B has the same stove for $489.00, Id be richer ;]
To me, your loan makes a huge difference in your wealth over many years, it's fact.

Meaning, Id be richer when I retire in another 40 years.

Assuming the two loans are the same in every other respect, true. However, loans are NOT the same. I would gladly pay a higher interest rate if it gives me certain frills such as an offset account and ability to redraw.

As an investor it's unlikely you'll keep one loan for very long anyway. Most investors keep refinancing to free up equity to buy more property, and to keep renewing IO loans. I've never had one loan for more than 3-4 years. So for example, I would stay away from a loan with a lower interest rate but high refinance fees. I would also pay for, say, a professional package because it saves me money on other things like valuations, loan applications, etc.

Don't miss the big picture because you're too focused on the small stuff. What's going to make you rich is compounding property appreciation, NOT nitpicking on loan rates. In any case, having a loan with a high break free, for example, would be more expensive than having a higher interest rate. And don't even get me started on offsets.
Alex

 

[The Y-man]

I'm wondering why you think that your biggest goal is to save every penny?

I think there is a semantic confusion between the "strategy" and "goal" on W2BW's part

The usual format would be:
<strategy> to achieve <goal>

ie. Save every penny to achieve <insert goal here>

Cheers,

The Y-man

 

[The Y-man]

To me, your loan makes a huge difference in your wealth over many years, it's fact.

I thoroughly agree with this. Leverage is an awesome tool (if used wisely).
I absolutely intend to die in huge debt (although I seriously need to sort out my life insurance prior to that event.... )

Cheers,

The Y-man

 

[Welcome]

I went over my investment IO loan today and came up with an idea,
My biggest goal when investing [even know this is my first time] is to save every penny I can, wherever I can and this should stand true for all of us too.

I'll take a few quotes from your myspace page...

Also play in a cover band for fun, experience, money, more gear, [Im a chronic gearhead] get to party hard at work, and the best part is.. we get to play at some top venues and get to play lots!

"Life's too short for bad gear you cheapskates!"

Maybe if you chill out on the gear that would be a good saving strategy? But still cheaper than coke

 

[Mr. Fabulous]

Meaning, Id be richer when I retire in another 40 years.

If it takes you 40 years to get wealthy, you're doing something wrong mate. Don't forget also that the road to wealth is about enjoying the time while your wealth is growing. Grow your investments, but for goodness sake, enjoy yourself along the way!

Like someone posted on here at some stage - No point in being the richest man n the graveyard. - so while it's good to get yourself a good structure, which a great broker and accountant and/or lawyer can help you set up, remember that the journey is half the fun!

Nothing wrong with spending some money on what you enjoy along the way, cause you don't know when you might get hit by the proverbial bus.

Mark