Interest only



From: Steven Darby

Hi all, I am new to the IP scene and since reading the books written by Jan Somers I have become very interested. Although I understand the strategy, I am still thinking that a interest and principle loan would allow for the purchase of property more frequently due to a faster build up of equity in the property. Although the interest only loan provides better tax advantages, I just can't seem to get over the slow build up of equity. If anyone can enlighten me a little further on the benefits of interest only loans, it would be much appreciated.

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Reply: 1
From: Rolf Latham

Hi Steven

Many great posts in the last few days and in the archives, and some diverse opinions.

If you feel that building equity with I/o is too slow and that P&I will help much I would suggest you would be buying in a very slooooooooow growth area.

A standard 25 year P&I loan will reduce the original principal by about 50 % in say 15 years - yaaaaaawn ! So a property bought 4 300 k now has 150 k equity due to debt reduction.

A well located but average Sydney Property will have tripled in value in 15 years. So the property is now worth 900 and there is 600 equity.

If you have personal debt reduce that with P&Ix2 , or if you have no debt reduce one of your IP loans with P&I, generally speaking I/O is a better bet for multiple props.


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Reply: 1.1
From: Ric1 .

I reckon you can do better with your (after-tax) dollars then to plough them into a P&I loan. Over a long period of time, say 20 years, you might get 10%p.a. back as your IP appreciates, but if you go IO, you can plough your own money into, say, a managed fund instead, and get 15%p.a. I've always thought property investment, which is comparatively low risk/low return stuff, is best done using OPM. Use you own savings to balance your investment portfolio with something that will give you a higher return.

Wot do yoose orl rekin?

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Reply: 1.1.1
From: G V

Hi Ric,

I would to know the type of managed funds which would give 15% return. Please advice. Thanks in advance.

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From: Ric1 .

Hi GV,

Have a look at Over the long term, this is very achievable. The secret is to avoid the actively-managed funds, which charge fees that eat into one's returns.


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