Interest Only Loan

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From: Mike .


What to do?
From: Boyd
Date: 10/7/99
Time: 11:10:39 PM

I have a question, hopefully someone can give me some advice. My wife and I are in the RAAF, we live in subsidised housing for about $90 per week. We have 3 rental properties but have low equity in all of them. They are financed with P&I loans on a variable rate (I'm not really a fan of IO loans). I'm not sure whether to concentrate on building the equity in our current properties and borrow against them a little later on or to save a deposit and buy a fourth, having another iron in the fire so to speak.

I would feel a little more comfortable if we owned more of our houses, then we could use rental income to pay off further properties. But if we're busy paying our current loans, our future investment property is going up in price. What to do?

 

[WebBoard]

Ian

Reply: 1
From: Mike .


Re: What to do?
From: Ian
Date: 10/8/99
Time: 10:53:49 AM

Get your head around I/O loans or at least long-term P&I loans with fixed rates for the first few years. The advantages are that tax breaks are maximized and you relieve pressure on your cash flow committment. If you want, you can still save the amount you would have paid in principle in an account so that you can make a lump sum payment when it is time to roll over the loan.

If you look closely at what you are currently paying in principle, you should find that you can easily afford to service the loan on an additional property if all of the loans were re-financed as I/O under the current interest rate regime. NB You should lock in the rates for at least 3 to 5 years in any new investment loan as you will be better able to sleep at night and as long as you have done your budgets, you should not have any rude suprises if interest rates rise.

 

[WebBoard]

Les

Reply: 1.1
From: Mike .


Re: What to do?
From: Les
Date: 10/8/99
Time: 6:11:56 PM

G'day Boyd,

You said it yourself "But if we're busy paying our current loans, our future investment property is going up in price." If prices ARE going up, and an I/O loan is fixed, then your Equity is on the rise. Now look at what it's costing with an I/O loan to gain this equity.

Then, compare it with the standard P&I loan. Yes, your equity is going up, SLIGHTLY more because of your payments, but the extra growth is ONLY EQUAL to those payments - so no EXTRA gain. And meantime, the Tax deductions are reducing with every extra dollar you pay off the principal.

Ian said it - get the 3 P&I's changed to 4 IO's and you can have your extra properties before their prices get much higher.

Re-read Jan's books - I know she mentions P&I for those that don't like IO, but I think she suggests what Ian did - IO for 5 years, THEN P&I.

And let me add one more thing - you are certainly heading in a happy direction. My thoughts are to get AS MANY properties as possible early, then the equity growth (multiplied by 4, 5, or 6) makes it EASIER than ever to get number 7!! It sounds like you have that thought in mind, too.

Go for it - but DO consider the IO way. Good luck

Les

 

[WebBoard]

Sue1

Reply: 1.1.1
From: Mike .


Re: What to do?
From: Sue
Date: 10/11/99
Time: 7:24:59 PM

Hi Boyd I used to not like the idea of IO loans as well but now have two IO's and one P&I. Think of it like this, our first house 19 years ago cost $28,750 and we borrowed $25,000. With an IO loan we would still owe $25,000 BUT that house is now worth $125,000 and I'm sure you will agree that such a small loan is peanuts as would the repayments be on $25,000. Meanwhile the lower repayments compared to a P&I loan mean we can have the cash flow to purchase another property. Check out with your bank the drop in repayments by going to IO from P&I, you'll be amazed. On a loan of $107,000 its around $300 less per month. Even if you just change over one or two loans and leave the others you might free up enough to be able to buy another property sooner than you think. ps. always fix the IO period for 5 years, then you don't have to worry about it for a long time. Hope this helps Cheers Sue