Interest Only on PPOR?

Hi All,

I am just wondering the best way to do my loan. My broker advised me to go with a P&I loan, unless I planned to turn my PPOR (first home buyer) into a IP in the future.

My situation;
Loan 305,000
With CBA and paying P&I.
100% Offest account
$10,000 in offset account
+$2000 in loan account.


Now, if I stay as is, putting all extra money into the offset account, then in say 2 years, lets say I will have $20,000 in there (pure ball park figures being used here). and I will have paid the loan down to, lets say $270,000.

If I was to move it all to an interest only loan, WITH a 100% offset account, but continued making the same payments (ie. $500 a week, not the less for interest only - at a guess $300 a week) plus my additional amount (ATM 600/week total). Would I be in the exact same position in terms of money, but instead, of $20,000 cash in offset and $30,000 in the loan, I would have $50,000 in offset, and none in the loan.

So assuming that is correct - should I switch to an IO loan - becuase I am disciplined enough to keep the payments above what they need to be. This would mean that I have cash ready for another house (be it IP or PPOR) so I am more attractive to the banks?

Or does it not matter, do the bank just go "he's worth X amount cause either way the money is either in cash or the house"


Cheers
Chris
 
My understanding is that being interest only gives you more flexibility and is a good idea if you have the discipline.

It also means you can turn the PPOR into an IP without having to refinance, you can withdraw all your cash from the offset account without having to answer any questions and I think all the interest is deductible once it becomes an IP, therefore you withdraw everything from the offset to pay for the new PPOR.
 
That's what I thought. Can anyone else confirm this?

Is there any downside to doing it this way? I mean lets say I never by an IP, and in 10 years I have $300,000 in my offset, I should be able to just drop it into the PPOR loan and pay it out?

I can't see any reason you would want a P&I loan if my assumptions are correct.
 
You're spot on.

The only reason why you might have a P&I loan is if you are very undisciplined with your money. Otherwise, I too can't imagine why people have them! (I have IO loan on my PPOR)
 
That's what I thought. Can anyone else confirm this?

Is there any downside to doing it this way? I mean lets say I never by an IP, and in 10 years I have $300,000 in my offset, I should be able to just drop it into the PPOR loan and pay it out?

I can't see any reason you would want a P&I loan if my assumptions are correct.

Hi exc,

To answer above : Yes, you can use your money for whatever reason you wish.

IO or P&I comes down to three things.

1. Personal preference.
2. Risk management.
3. Investment Strategy. (Taxation purposes and cashflow)

Personally, as an investor I would highly recommend IO. Generally speaking: Choosing P&I on your PPOR now is definately a big No NO if you are considering investing. It could possibly cause you alot of confusion down the track- not to mention loss of Negative Gearing benefits.

If you maintain an offset account - you can access your money any time you like and still hyperthetically be paying P&I.

Note: If you are investing - you will need to have a completely seperate Offset account or LOC for this purpose only.


Regards JO
 
So what if I never invest? Is an IO loan, but paying the P&I rate (or greater) the best option for me right now anyways?

Are there any downsides to an IO loan on a PPOR as long as you are making the additional payments?
 
Hey eXc,

If you never invest, and you pay monies into your offset at the same rate as P&I then you will be in the same position as if you had a P&I loan.

However, what you will have is the flexibility to invest later, as you will have access to a large pool of cash.

If you pay this directly off the principle your money is gone and if this house becomes an investment later, then you will not be able to negatively gear it.

Imagine if in 10 years time, you are in a position to pay out your current house, but instead you move out, take your $300K as a deposit for your next house and convert the current one to an IP, you'll still be able to access all of the tax benefits and have a "hopefully" reduced loan on your next place.
 
HI exc,

Do what you are comfortable with. You will not be worse off from having an Offset and IO unless perhaps by $6mth for your offset account.
There are no downsides.
 
If you never plan to invest or turn PPOR into an IP (big call now "never") then the scenario you propose will cost you the same amount by way of interest payments. On the other hand you would need to renegotiate the IO period every 5 years until you were ready to pay the loan out. This would attract a fee each time and be subject to credit scutiny.

Regards
Steve
 
Thanks All, that is the answer I had hoped for.

Just so you know, i assume I will put this house into a IP at some point, however I just wanted to have the scenario, to be sure that there is only upsides, not downsides. I do not have a high paying job, and plan to have kids in the next few years, so it may not be an IP, but I am hopefull.




Bradsdad - why is there a renegotiation every 5 years? Do you go into an interest only loan for only 5 years, not 30 like a P&I ?
 
Bradsdad - why is there a renegotiation every 5 years? Do you go into an interest only loan for only 5 years, not 30 like a P&I ?

Most loans that offer IO will still be a 25/30 year loan. The first 5 years are IO, then it will revert to the remaining 20/25 yrs as PI. If you want to stay on IO, you need to effectively refinance and renegotiate another, say, 5 yr IO period.
 
as others pickup up on, you'd want to be 110% sure on your definition of 'never' matches that in the dictionary before you decide on the P&I route.

the only downside i can think of, and a minor one at that, is you may be able to get a 'slightly' better loan as a basic variable P&I compared to std variable+pro package(offset) I/O, but that shuts a large door that most people prefer to leave wide open

theres 2 sides to think of about the whole 'forced spending' P&I deal that you must put aside $xxx for loan each week - the other side is that typically people with P&I wont be saving much if any outside of the money put in to the loan - thats their 'spending money' (with a couple grand for emergencies).

whereas the other side of it is that if you're putting all your money into the offset minus what you need to spend, you may not know you have as much 'spending money' and therefore might not be obligued to spend as much every week. i know topping up a loan (in this case the offset account attached to one) and seeing how much it reduces the term of it can be a good motivator
 
IO with offset is better than PI for a number of reasons:
- lower repayments means you have more to invest
- keeps loan high in case you move out
- helps cashflow if you run into problems
- allows you to pay extra if you wish
etc
 
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