Interest Only Loan

[WebBoard]

From: Mike .


Interest only versus Principal & interest
From: Joe
Date: 5/12/00
Time: 1:18:20 PM

Hi, I'm new on the forum and have been reading here for the last few weeks. I'm looking for my first IP and hopefully it will be the first of many. This might be a silly question, but why is it everyone says to pay interest only and not principal and interest? Wouldn't there be more equity if you're paying principal as well and therefore shrink the loan down? Hope someone can give me a good answer. p.s. i really like everyones comments and some people really know what they're talking about here. great stuff, keep it up.

 

[WebBoard]

Brenton

Reply: 1
From: Mike .


Re: Interest only versus Principal & interest
From: Brenton
Date: 5/12/00
Time: 3:09:51 PM

HI Joe,

I am like you as far as knowledge of I/P's etc and am the author of the I/P by mistake mail floating down lower on the threads of messages. I have decided to hang onto mine at a fixed interest rate of 7.95 for 3 years and I did everything wrong. I have gone interest only and have fixed $250,000 a this figure allowing me to pay 10% off over 3 years and I have a further $42000 at current variable rate of 7.9%. The $42,000 will be paid off in a few months due to other business activities and then I am going to let it sit for 3 years , just renting it and considering my options when the time comes.

I did not choose to be in this situation initially but i must say that the help I have received on this forum has been invaluable. I owe many of the individuals on this forum a beer or two at some time.

I would think interest only would be the way to go but certainly listen to the more experienced investors on this forum as I am a born again believer in their opinions. As you will read in my postings earlier, I was actually looking to move into the property and then a change of heart from my wife and I complicated it a little. If you stick close to this group, I think they will show you positives that can be gained in almost any situation.

Best of luck in your ventures in the future.

regards, Brenton Adelaide SA email [email protected] ph 08 82852400 fax 08 82852411 http://www.posnav.com.au

 

[WebBoard]

Andrew S

Reply: 1.1
From: Mike .


Re: Interest only versus Principal & interest
From: Andrew S
Date: 5/12/00
Time: 4:24:12 PM

Hi Joe,

The main reasons for going interest only are as follows:

1) It minimises the cash outlay each month (P&I payments are considerably higher than IO)

2) It maximises the interest claimable as a tax deduction which in turn minimises the monthly cash outlay. With P&I as the loan falls over time, your deductions reduce and the property can end up costing you more. Don't forget that only the interest part of the P&I repayment is claimable as a deduction.

3) If you are investing for the long term then the capital growth of the IP will make the outstanding loan seem insignificant, eg if you had paid $20K for a property twenty years ago and now it may be worth $200K then the $20K loan would now seem pretty small.

I hope this helps, Andrew

 

[WebBoard]

Les

Reply: 1.1.1
From: Mike .


Re: Interest only versus Principal & interest
From: Les
Date: 5/12/00
Time: 5:55:43 PM

G'day Joe,

Andrew S has covered the major points - the only extra point I can think of (often overlooked) is this:-

"Re IO versus P&I, I always opt for IO for Investment property. One of my earlier answers (to another forum writer) documents the gains of IO vs P&I - probably the MAIN point being that it takes $200 earned (at 47% marginal Tax rate) to pay off $100 on your loan - and the Equity "leap" when you do that? $100 !!! (whoopeee ;^) Instead, get the full $200 benefit by gaining Tax deductions, and DON'T water them down by paying off principal." (JS forum Oct 99)

Regards, Les

 

[WebBoard]

Owen

Reply: 1.1.1.1
From: Mike .


Re: Interest only versus Principal & interest
From: Owen
Date: 5/16/00
Time: 12:38:08 PM

Hi,

My partner and I are fairly new to the IP game like Joe and have an IP fixed in an I/O loan for 3 years. We borrowed the lot 2 years ago so it's negatively geared. Although the capital gains have been quite good the thing that is stopping us from rapidly moving forward is cashflow. We have plenty of equity in our own home and it's increasing in our IP but the only way I can see us being able to accelerate the ability to purchase more IP's is to increase our earnings.

As a result we are changing our goals and aiming for maximum income from positively geared properties. We will still be using I/O loans and negative gearing in the short term (5 to 10 years) but the goals is to be financially independent. Passive income vs earned income.

To achieve this wouldn't it be better to have any IP's as P&I loans so that the cost/income ratio will grow along with the capital growth. For example, if I have 5 properties costing $200pm each after tax I can only afford so many. If I have 5 properties earning $200pm after tax because I have reduced my debt I can afford an unlimited amount of these. The best side effect is I can stop working (when the numbers are real) and still have some negatively geared properties for the tax benefits.

Any comments or am I being stupid about this and not seeing something????

 

[WebBoard]

Joe

Reply: 1.1.1.1.1
From: Mike .


Re: Interest only versus Principal & interest
From: Joe
Date: 5/19/00
Time: 1:59:46 PM

Hi everyone! Thanks for all your replies. It just goes to show, we have so much to learn and this is a great place to do it. We won't be rushing to buy but hopefully we'll find one soon. Wish me luck!! Joe.

 

[WebBoard]

Gee Cee

Reply: 1.1.1.1.1.1
From: Mike .


Re: Interest only versus Principal & interest
From: Gee Cee
Date: 5/12/00
Time: 10:35:48 PM

My comment on this is only basic.

But if you are a serious investor I/O has to be the way to GO!

You will want to hold the most amount of property as possible for the minimum amount of (money hire) % Interest payable as possible.

Therefore, if you calculate what P & I will cost you. Then Calculate what I/O will cost you there will be a signifigant difference.

This difference basically is used to fuel some of the cashflow/loan etc for the next property's -ve costs.

Basically, if you are not paying principal off each loan then this money can be used to fuel another investment property - @ I/O of course.

At the end of the day if you control 2 properties and pay P & I you will not be as well off as the person that controls 5 properties but only pays I/O. (Growth being comparable of course).

This is only basic but to the point.

Gee Cee

 

[WebBoard]

Simon

Reply: 1.1.1.1.1.1.1
From: Mike .


Re: Interest only versus Principal & interest
From: Simon
Date: 5/13/00
Time: 10:13:28 PM

I understand the reasoning behind the I/O loan, however would I be correct in saying that you'll only benfit from I/O when you sell the property? You are never going to own it with I/O, but build up equity in the property and thereby 'gaining' the 'deposit' for the next one? I thought you weren't supposed to sell either?

Have I missed something here?

Simon

 

[WebBoard]

Les

Reply: 1.1.1.1.1.1.1.1
From: Mike .


Re: Interest only versus Principal & interest
From: Les
Date: 5/20/00
Time: 6:18:29 PM

G'day Simon,

Simon> I understand the reasoning behind the I/O loan, however would I be correct in saying that you'll only benefit from I/O when you sell the property?
<p>
Les> No - as GeeCee mentioned, you benefit by paying less to own the property, thus leaving more available money available to fund IP #2, #3, etc.
<p>
Simon> You are never going to own it with I/O, but build up equity in the property and thereby 'gaining' the 'deposit' for the next one? I thought you weren't supposed to sell either?
<p>
Les> True, you will never "own" it while there is a mortgage on it, but you CONTROL it for all of the years you decide to keep it. And, once the Equity has jumped, you borrow against it (2nd mortgage, or refinance the whole thing) to "take out" your deposit for the next IP. Thus, this property now has a higher mortgage than before - but as time goes on, the rents increase to offset the extra mortgage costs when you do refinance.
<p>
And (as someone else pointed out), what if you owe $200k on a property that is (20 years later) worth $1million - you don't "own" it, but it OWES YOU $800k!!!! And that is OK!!
<p>
Hope that helps, Les
<p>

 

[WebBoard]

Simon

Reply: 1.1.1.1.1.1.1.1.1
From: Mike .


Re: Interest only versus Principal & interest
From: Simon
Date: 5/21/00
Time: 2:22:08 PM

Hi Les, Yes, I understand that now, thanks. Just took a bit to get my head around it. Sounded like you thought the Peter Spann seminar was beneficial. I was keen to attend both his and John Burley, however I'm in East Timor and have been since December, with a couple of weeks home in March. So I've missed both. I'm due home around mid June. Looking forward to getting my first IP.

Cheers, Simon

 

[WebBoard]

Les

Reply: 1.1.1.1.1.1.1.1.1.1
From: Mike .


Re: Interest only versus Principal & interest
From: Les
Date: 5/21/00
Time: 2:54:28 PM

G'day Simon,

Yes - I did get a lot from the Spann seminar - and am looking forward to the Wealth Works portion later in the year.

Good to see you can "make contact" from East Timor - do you also have a range of good books up there to fill up those idle hours?

I bet you can't wait to be home again - is this then the end of your "tour"? Or will you be back again later?

If you are Sydney based, maybe we'll get to meet at a forum lunch some time.

Regards, Les

 

[WebBoard]

Simon

Reply: 1.1.1.1.1.1.1.1.1.1.1
From: Mike .


Re: Interest only versus Principal & interest
From: Simon
Date: 5/21/00
Time: 7:08:18 PM

Hi Les,

We've been pretty fortunate in that the government, via Australia post, has allowed mail up to 20kg per item, delivered free of charge whilst in Australia. However, we (defence forces) can then get it to Timor via our aircraft or ships. So I've had a chance to read Jan Somers, Robert K John Fitzgerald and I've got limited access to the internet. You provided me with the John Burley/Peter Spann sites, so that has only spurred my interest more!! As you can tell from my questions, I'm new to IP, however I'd like to think I'm learning reasonably quickly.

Yes, this is my last tour in Timor, I'm looking forward to coming home. I'm based in Brisbane, however I'm posted to a new job at Williamtown in Newcastle NSW at the end of the year, so maybe a lunch isn't out of the question?

Cheers, Simon