Extending loan period when re-financing

Hi folks,

Assuming you were drawing down equity from IP #1 to fund the deposit for another IP #2, do you take the opportunity when refinancing IP #1 to go back out to 30 years, thus reducing your repayments and freeing up cashflow?

What are the risks involved here? I suppose if you keep extending back out to 30 years every time you drew down equity, the loan might never get re-paid but if there is good capital growth then would that matter, especially since with the extra cashflow you can buy more and more IPs?

Which then begs the question, assuming instead you have an IO loan, since you never pay anything off (if you keep extending the 5 year IO period again and again), then it should be possible to make "repayments" into a 100% off-set account effectively behaving the same way as a P&I repayment, except that you can get accesss to the funds at anytime for future investing? Am I correct?

Thanks so much!

Hi Mal

Depends if u have LMI on those loans

Many lenders wont gove u a new IO period without a new premium.

Yup, placing the P part into the offset is a good risk management strategy

Thanks Rolf. Any other investors that regularly refinance their loans back out to 30 years to keep their repayments low to free up cash flow for other investments? I suppose the one thing to be careful of is to make sure the negative gearing benefits still apply i.e. the rent doesn't exceed the loan repayments!
Unless your total rent from all properties exceeded your total deductable loans negative to positive gearing wouldnt be an issue. The tax office blends all your loans, and all your income into your tax return.
I have usually refinanced to a new lender, and therefore a new loan term each time I re finance.
Sometimes I refinance more than one loan/property to pull enough equity for the next purchase, sometimes I just top up with the exisitng lender.
All the loans are interest only, so there is no impact on cashflow until or if I ever wanted to pay them back. But why would I want to do that instead of accessing the equity and buying again?
There are obvious risks to any gearing strategy, and everyone has a diferent level and way of managing risk.
Thanks tobe, I think I get it now. So an interest only loan term of 30 years on $300k has say repayments of $1500 a month. Since interest is calculated daily on the loan amount, because the value of the loan has not changed, then the loan term does not matter - the interest only repayments will be exactly the same on a loan of $300k whether the loan term was 5 years, 20 years or 30 years. Am I correct?
Yes, until the interest only period expires, usually 5 or 10 years after the loan is drawn. At that point it can be a bit tricky getting a new interest only loan, especially if the banks policies or your details have changed.

Like previous posters have said, even though the loan is interest only, there are lots of good reasons to make principle repayments either into the investment loan offset, or if you have one, the O/O property loan.