I.O. loans can I pay a lump sum off principle

From: Denise Macadam



Greetings All,
Have just returned from the crappiest of days at work, almost thinking of chucking in the house to downsize and buy up on IP's - one of my many crazy ideas made me think of this.
Will apologise up front as its probably not a taxing question for those in the know!
If I changed my residential home to an I.O. loan - to save a few bucks for when i chuck in the towel, I'm still dreaming - can i make some form of lump sum payment off the principle? I want it all ways of course, a lesser mortgage repayment, increasing cashflow but a way to decrease the outstanding principle if and when I wanted to.
Is anything like this possible?

I live to read these posts,(sad arnt I) it keeps me going through the night, knowing when I do arrive home, i am going to be treated to the most wonderful, informative, witty, and educational exchanges - and all on a subject i am so addicted to, thank you one and all for your generosity.

Regards,
Denise
 
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Reply: 1
From: Dale Gatherum-Goss


Hi Denise!

I'm sorry to hear of your crappy day -tomorrow must be better!!!

I understand that yes, you can repay a lump sum off your IO loans, although, I am sure that Rolf will explain that there are limits and that it depend upon the loan that you negotiate.

Have fun

Dale
 
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Reply: 1.1
From: Jacque Parker


Hang in there Denise! We all have crappy days, just remember that you're not alone. At least you've started a way to get out of that job you're in and you won't still be there when you're 60. I know this is small consolation..

You've been so helpful to me lately that I just had to try to cheer you up. Hope your weekend is a winner!

Cheers and smiles, Jacque :) :) :)
 
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Reply: 1.1.1
From: Frank Shead


Denise,
You can reduce your mortgage with a good mortgage reduction programme.
Most financial areas charge a 1% breaking fee in your first year of the mortgage and reduce the fee by 20% over five years. Again some facilities allow you to pay off up to $50,000 in the first year. It depends who are with and how long.

Frank Shead
 
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Reply: 1.1.1.1
From: Jeremy Laws


Denise,
You may have difficulty changing P/I to I/O - I have in the past as statistically banks records show that loans converted to I/O tend to foreclose shortly after. You may have to refinance. In which case beat a path to Rolf's door and stand in line with everyone else! On any of my I/O loans, I can make lump sum payments at any time, in any amount (though one must be >$500) I fail to see why anyone wants a P&I loan!

PS Dump the job!
 
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Sim

Administrator
Reply: 1.1.1.1.1
From: Sim' Hampel


On 2/1/02 9:58:00 AM, Jeremy Laws wrote:
>I fail to see why
>anyone wants a P&I loan!

If you take the time to actually do the maths (unfortunately this is beyond most of the people here - the maths is actually a little tricky - perhaps get your accountant to help), you will find that there are circumstances where P&I is better than IO (gee... haven't we had this conversation before ? ;-)

I specifially am referring to the situation where you buy mostly cashflow properties with low potential capital growth.

Indeed, I believe it works something like: If the capital growth rate is less than the sum of the interest rate and the rate of inflation, then due to the "time value of money", you are better off with a P&I loan than an IO loan. In other words, after say, 10 years, you will actually have made more money by savings in interest payments from paying P&I than you would have gained from the extra cashflow from IO.

The common argument is that you should keep the excess cashflow for servicing more debt, and if you are achieving high levels of capital growth from these properties, then you will certainly be better off with IO.

However, since there are more and more people taking the "never negatively gear" path and are buying properties with low capital growth potential, then seriously look at the long term post-inflation benefits of P&I.

Note that if you manage to get cashflow positive with high growth, then the numbers will show you IO is the way to go... if you can use the excess cashflow to buy more of the same !!!

So they key is... capital growth... IO, no capital growth... P&I.

 
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Reply: 2
From: Denise Macadam


Greetings again,

Thank you one and all for your replies, so appreciated.
Hi Jacque, a big thanks, Frank and Dale, thank you.
Jeremy, God i would love to dump the job, I fantasize about houses and seminars etc whilst I am there and how I need this income for a bit longer yet to put it into practice.
Yes I will be cuing for Rolf and his magic wand.
Sim, such a great reply and so well explained, thank you.
I had to speak to a lady last night with a gambling problem - I listened to her for 30 minutes and all the time she was feeding a machine around $3,000. I thought to myself - I don't want to give her the gambling help line number, why don't I give her the Freestylers number instead!.
let her see in practical terms what she could have achieved. I cut her off mid sentence and said, "lets cut to the chase here", how much have you lost in the last twelve months, answer $150,000. Hmmm I thought, heres a way to combine the crappy job and my addiction. Can you guess my opening line....
"Now I am no expert, but do you realize you could have purchased about 10 properties with that $150,000."
No she said, I could only buy one house with $150,000 - Me: "why settle for one when you can have so many more"
Somehow I think she may still find a way to gamble $50,000. within the next 4 or 5 months and I will be flat out coming up with $5,000.

Thanks one and all
Kind Regards
Denise
 
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Reply: 3
From: Rolf Latham


Hi Denise

You can reduce most Interest Only Loans to near zero without penalty providing that the rate is variable and NOT a fixed rate.

Interest only almost always has unlimited principal reduction at the borrowers option.

As Ll says the nice challenge you will have is getting your lender to redo your loan from P&I to I/O. In most instances this requires a fresh loan assessment with the same lender.

One way out of this is convert the majority of the loan to your lenders LOC product. LOCs are usually by nature I/O but beware, if you are using your lenders el cheapo product, the increased rate on the LOC may offset most of the benfefit form not paying P&I.

Early repayment penalties for owner occupied loans tend to be restricted to most non bank lenders, most honeymoon products and all fixed rate loans where rates have come down since you have fixed.

ta

Rolf
 
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Reply: 1.1.1.1.1.1
From: Dale Gatherum-Goss


Hi Sim!

You wrote:

"If you take the time to actually do the maths (unfortunately this is beyond most of the people here - the maths is actually a little tricky - perhaps get your accountant to help), you will find that there are circumstances where P&I is better than IO (gee... haven't we had this conversation before ? ;-)"

Which really has me worried. I'm dyslexic and can't count . . . am I in the right place?

Have fun

Dale
 
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Sim

Administrator
Reply: 1.1.1.1.1.1.1
From: Sim' Hampel


On 2/1/02 3:49:00 PM, Dale Gatherum-Goss wrote:
>
>Which really has me worried.
>I'm dyslexic and can't count .
>. . am I in the right place?

Hmm... maybe I am over-estimating the abilities of most accountants to understand the mathematics of finance ?

Perhaps people should take the problem to your professional mathematical advisor then. You DO have a mathematician on your team of experts don't you ?

It's okay Dale... so long as you make the right noises and let people THINK you know what you are talking about (get that authoritative voice thing happening) you'll be fine !

Don't let the dyslexia worry you either, most of your clients won't know what you're talking about anyway... they just want you to tell them where to sign and trust that you know what you're doing.

Oh, and I would be really worried about an accountant who insisted on counting everything by hand rather than use these new-fangled computer thingies !

;-)

 
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Reply: 1.1.1.1.1.1.1.1
From: Dale Gatherum-Goss


HI Sim

Counting by hand is something that I wasn't too good at, until that is, I started using my toes as well!!!

Have fun

Dale
 
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Sim

Administrator
Reply: 1.1.1.1.1.1.1.1.1
From: Sim' Hampel


I always found that counting by hand was difficult, as you needed to use one of them to do the counting on the other. When you swapped hands over to go above 5, it got confusing.

Counting on the toes is certainly a good step. It also helps if you have enough flexibility to use your nose to do the actually counting, leaving all 20 fingers and toes available to keep count.

If you get tricky, you can count up to 1048575 using just your fingers and toes in binary form (hold digit up for '1' and down for '0'). If you are one of the lucky people to be born with 11 toes, then you can get to 2097151 !

Multiplication and division become relatively easy, as it's just "bit shifting". Helps if you can deal with round numbers though, as decimals can get painful. Who cares about a few cents anyway, hey ?

If this sounds too hard, perhaps you could take to wearing beads, and use them like an abacus ?

And if you want to get fancy, you can make your own spreadsheet by getting your staff (or customers !) to stand in various squares on the lino floor in the kitchen (or bathroom if need be) of your office.

So many ways to do it.

Here's one we can try at the pub crawl. I'll find someone who can bring along a game of "twister", and we will map various positions and colours to numbers. So when we want to do some calculations for working out how to split the bill during the night, we just need to get people to perform certain routines on the mat ! Never knew such a game could be fun, sexy AND useful at the same time did you ?

Here's another idea, we use beer glasses emptied to different levels to make sounds of different frequencies when struck by a swizzle stick. We assign a different value to each of the frequencies and then play a tune to do our calculations ! People like See_Change can help with transcribing the melody to keep a record of the transactions. Would make tax time easier too... no more paper based forms... we just call the ATO on the phone and sing the "tune" to them !

Wait, one more ! Hmm... nah... you wouldn't understand. Let's just say that it involves a hamster, a tub of tiling-grout, and a cricket bat. It gets kind of messy, but it allows you to calculate the solution to some funky multi-degree polynomial equations. As you often find yourself with the need to do. Always happens to me in the supermarket actually... and do you think I can find a cricket bat when I need one ? Sheesh.

 
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Reply: 1.1.1.1.1.1.1.1.1.1
From: Asy .


Does anyone else worry about Sim, or is it just me?

asy

"Don't forget what happened to the guy who suddenly got everything he ever wanted...
He lived happily ever after.
(Willy Wonka).
 
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Reply: 1.1.1.1.1.1.1.1.1.2
From: Dale Gatherum-Goss


G'day Sim!

Fantastic post!!!! Mind you, the last time I played Twister it was the nude version . . .certainly placed a new light on the expression of looking up old friends.

Have fun and thanks for the advice. I'll set things in motion here at the office

Dale
 
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