Interest Only Loan

[WebBoard]

From: Mike .


INTEREST ONLY
From: JODIE
Date: 10 Feb 2001
Time: 09:14:27

Hi Guys, I hope someone can help me! I have read all these books and looked into buying my first IP. I totally had it figured out with heaps of confidence! Until now. Help what should i do - buy an IP with an INTERST ONLY LOAN or buy an IP paying both principal & interest? Which do u believe is better? With the interest only when do u stop actually paying off the interest??? Is it when u decide to sell the property?

Help

Thanx Jodie

 

[WebBoard]

Rick

Reply: 1
From: Mike .


Re: INTEREST ONLY
From: Rick
Date: 10 Feb 2001
Time: 16:12:54

Hi Jodie,

Its the old P&I or Interest only debate again...its also a bit like the old "to -ve gear or +ve gear"; or which comes first the chicken or the egg debate?? All i can say from someone who has 2 IPs there is no right or wrong way...its basically what you feel is comfortable and right for your own situation and peace of mind. Everyones situation is different along with their ability to emotionally live with what ever their situation and decision is. What decision I make and have to live with is not what someone else may be comfortable with.

But in my situation ( which was to control my portfolio of IPs in my name and have the tenant and taxman pay for all the ongoing up keep and running costs on the way to long term capital growth), I opted for "Interest Only" investment loans.

I am not interested in owning IP's outright mainly for two reasons:

1/ P&I reduces your cashflow; instead of paying of the principle that same money can now be used as deposits on more IP's, and

2/ I dont believe someone can live and maintain a high degree of lifestyle off the rents collected from a few IP's held in a Property Portfolio, as well as pay taxes on those rents, maintain the up keep and running costs in keeping the portfolio.

But as I said earlier its entirely up to your goal plan for creating your portfolio in the the first instance, and what you believe and feel comfortable doing within yourself.

To your second question RE: Stop paying interest.

With an interest only loan you will never own the IP or stop paying interest until such time as you sell the property and pay out the loan or just simply pay out the loan in lump sum(s). But a word of caution if you want to pay out in this way , read the fine print in the terms and conditions to make sure you wont be in breach of any clauses and have to pay a penalty fee , or simply if you do decide the Interest only loan is the way to go for yourself, then for peace of mind, shop around from the start to find a loan that allows you to pay out without fees when you like. I hope I have been of some help to you.

Rick

 

[WebBoard]

Rolf

Reply: 1.1
From: Mike .


Re: INTEREST ONLY
From: Rolf
Date: 10 Feb 2001
Time: 18:50:47

Hi Rick

As you say horses for courses - where only IPs are involved the line is very wide and grey.

There is one common area where the decision between I/O and P&I is relatively clear. That is the situation of where someone may have a "personal" (not tax deductible) debt such as a home mortgage. In that scenario I would almost always recommend an I/O for the IP since the main focus should be to dump your non tax deductiblke debt as soon as possible.

Taking this one step further - the loan set up where someone still has a "home loan" is to include a "third loan" or low cost Investment Line of credit to and pay all I/P running costs such as rates, repairs etc out of that. The interest cost on this third loan is tax deductible also. This will chop another few months (or years) out of a typical home loan.

Regards, Rolf