Interest only or Principal and Interest

[AndrewE]

Hi all,
My wife and I just bought our first investment property which is next door to our PPOR
We weren’t looking at buying but the opportunity was just to great to pass up..
Anyway, was interested to know how people with IP structure there loan, at the moment, our mortgage adviser has said to make it Interest only for the first 5 years and then start paying the principal, Is this how most do it.. Or should i put in a little principal each week anyway..
I’m just interested to know how others do it.. and what the benefits are..

Thanks
Andrew

 

[alexlee]

A common question. Given that IP interest is deductible and PPOR interest is not, it would make sense to always go IO on the IP loan. When the 5 year IO period finishes, just refinance into another IO loan, and you can probably get some equity out at the same time.

Basically, it's better to put any extra money towards your PPOR loan (reducing the non-deductible interest) than towards your IP loan (where the interest is deductible).

If you're paid off your PPOR loan, put an offset against the IP and put money into that.

 

[tess85]

Given that IP interest is deductible and PPOR interest is not, it would make sense to always go IO on the IP loan.

While Alexlee didn't explicitly mention PPOR loans (because the thread topic wasn't about this), I just want to say, also go IO on the PPOR loan if possible, it may not stay a PPOR forever.

 

[alexlee]

Agreed. An IO with offset is a very flexible setup which is useful for PPOR and IPs. Be careful with cross-contamination, though.

 

[AndrewE]

Thanks people,
Tess never thought about making the PPOR IO, we are looking and moving in about 5-6years time, so its probly a good idea..
and Alex, when we bought the house we payed 320k for it greatly undervalued.. we had the bank value it over the settlement period and they come in at 355k value.. so theres equity there already.. which is fantastic..
So in a couple years might look into buying another IP too