IO loan can only be for 10 years max?

[SupaRex]

Hi Guys,

I've been told (and I believe it's true) that you can only have an interest-only loan for 10 years on a property. After that, it must convert to P & I.

Is this true? Is there a way around this "limitation"?

Swapping lenders (refinancing) doesn't work apparently - it's a Government thing.

Sorry if this is a dumb question guys

Cheers,
Brad

 

[Ed Barton]

the only dumb question is the one that wasn't asked; as they say.

to my knowledge no government requirement. it's really up to you and your bank.

 

[SupaRex]

to my knowledge no government requirement. it's really up to you and your bank.

So simply refinancing *would* work?

 

[Propertunity]

It's not a government thing it is a lender thing. One of my lenders keeps rolling my IO term over to IO every 5 years unless I tell them not to. Another offered me 15 years IO on top of the 5 years I just had. Another wanted me to do P&I after the first 5 years of IO were up.

 

[Ed Barton]

So simply refinancing *would* work?

when it comes to borrowing you should ask people who do that to be certain. I'm sure one of the bankers will be along soon to answer.

in the mean time - i believe most banks will keep rolling over IO loans, or at least historically they have. IF prices dropped significantly I'd imagine they'd want you pay something off the principal.

edit - there we go a more certain opinion before i even hit the post button.

 

[Rolf Latham]

So simply refinancing *would* work?

yes but

assuming you can at the time........

5 years for Mortgage insured loans is not uncommon, stretching to 15 years IO with a few lenders and notionally 30 years for an "evergreen " LOC.

ta
rolf

 

[Aaron_C]

The IO period is at the discretion of the lender. 5 years is normal and anything after that is with the lender's consent - but the default position is for it to go to P&I.

 

[Rondofj]

So how does the loan convert to a PI or another IO loan after the interest only term assuming you have paid off all the interest at the end of the term, say 5-10 yrs?? Because then you only have the principal left.

What is the general strategy with investors taking IO Loans- how many years and what happens at the end of the term?? Supposedly you have principal left only, how many increments and years do you need to pay this off in??

I dont understand how IO loans benefit investors except reduce cashflow out and make it more easy for a positive cashflow income from the property- but then you end up paying much more over the longer term, correct?? What happens after the end of the term, what is the benefit of this type of loan??

Cheers

 

[Peter_Tersteeg]

So how does the loan convert to a PI or another IO loan after the interest only term assuming you have paid off all the interest at the end of the term, say 5-10 yrs?? Because then you only have the principal left.

You're not paying 30 years of interest in 5 years, you're only paying the interest component of what would otherwise be principal and interest. If your monthly P&I repayment is $3,200/mth, this might be comprised of $3,000 interest and $200 principal per month.

In an interest only loan you'd only pay the $3,000 per month.

After the 5 year interest only period you still owe the original amount and you start to make P&I repayments over the remaining term.

What is the general strategy with investors taking IO Loans- how many years and what happens at the end of the term?? Supposedly you have principal left only, how many increments and years do you need to pay this off in??

The general strategy behind I/O loans is to preserve cashflow which can be diverted to other uses, such as paying down non-deductable debt or purchasing other assets. It also has the secondary benefit of keeping deductable debt maximised, which maximises tax deductions.

I dont understand how IO loans benefit investors except reduce cashflow out and make it more easy for a positive cashflow income from the property- but then you end up paying much more over the longer term, correct?? What happens after the end of the term, what is the benefit of this type of loan??

Yes, you do end up paying more over time, but due to inflation, the value of the true value of the debt (and the repayments) reduces. As long as your asset value and income received are increasing, the repayments become more and more irrelevant.

 

[Rondofj]

Thanks for the reply PT Bear, getting to see some
Light in IO loans now. Does it make sense to convert
a IO loan after 10yrs to PI or to another IO loan for an
Investment purpose? Because the only advantage i can
see is within the first 10yrs where the loan is tax
deductable. After the term you still have the whole principal
debt remaining and what with inflation and rising income
from the property you are better off but not by much, correct?
The way i see it is you are losing money over the long term
(bigger debt than PI)to save on tax deductions similar to
negative gearing strategy. The only advantage I can see is
having a possible positive cashflow from the property, tax deductions etc
, but then after the IO Term when the loan reverts to PI, do the payments
go up and you end up negative geared? Please enlighten me where i have
missed something.

 

[Propertunity]

Have a read of this thread, it may help your understanding:
http://www.somersoft.com/forums/showthread.php?t=50517

 

[Dean2012ad]

Does it make sense to convert
a IO loan after 10yrs to PI or to another IO loan for an
Investment purpose?

Depends on what your cash flow is like, and if you've still got a PPOR that needs paying down.

After the term you still have the whole principal
debt remaining and what with inflation and rising income
from the property you are better off but not by much, correct?

Yes, but you will hopefully have paid off some of your PPOR (non-deductible)with extra money you would have be putting in a P&I loan for your IP where interest on the loan is tax-deductible.
The money saved in PPOR interest far out weighs the extra amount you pay at the end of the IO period.

but then after the IO Term when the loan reverts to PI, do the payments go up and you end up negative geared? Please enlighten me where i have missed something.

Yes, the payments go up.
E.g.
- $300k IP loan over 30 years with 10 year IO period
- After 10 year IO period, P&I payments start.
- Loan is still $300k but payments calculated over the remaining 20 years.
Weekly payment is about $80/wk more than if the IO period wasn't taken(based on todays variable interest rate).

However, after 10 years I would hopefully be earning more than an extra $80/wk. My IP would be worth more. And my PPOR loan would be reduced significantly, meaning lower non-deductible interest.

 

[JohnHenry]

You're not paying 30 years of interest in 5 years, you're only paying the interest component of what would otherwise be principal and interest. If your monthly P&I repayment is $3,200/mth, this might be comprised of $3,000 interest and $200 principal per month.

In an interest only loan you'd only pay the $3,000 per month.

After the 5 year interest only period you still owe the original amount and you start to make P&I repayments over the remaining term.



The general strategy behind I/O loans is to preserve cashflow which can be diverted to other uses, such as paying down non-deductable debt or purchasing other assets. It also has the secondary benefit of keeping deductable debt maximised, which maximises tax deductions.



Yes, you do end up paying more over time, but due to inflation, the value of the true value of the debt (and the repayments) reduces. As long as your asset value and income received are increasing, the repayments become more and more irrelevant.

So in this case Interest Only can only be use for Investment Property ?
I'm planning to buy secondary property in Sydney suburbs that I will rent out one of the spare room, can I use IO loan ?

 

[Peter_Tersteeg]

So in this case Interest Only can only be use for Investment Property ?
I'm planning to buy secondary property in Sydney suburbs that I will rent out one of the spare room, can I use IO loan ?

Lot's of people purchase their own home using interest only loans for various reasons. Lenders don't usually question it and if they do it's generally easily explained.

If you're looking to rent out a single room, I don't know that I'd use an interest only loan to treat it as an investment. The gearing benefits are likely to be minimal and you'd loose some of the capital gains advantages if you sell.

I'm not saying you shouldn't use an interest only loan however...

A great reason to use an I/O loan on a PPOR might be that you may rent the property in the future and you're structuring your finances with this in mind. Combining this with an offset account can be very powerful.

 

[Rolf Latham]

Lot's of people purchase their own home using interest only loans for various reasons. Lenders don't usually question it and if they do it's generally easily explained.
.

A couple are particular standouts, and Im sure there are more, but I recall NAB direct dont like IO on PPOR, and Heritage is another.

t
arolf

 

[Peter_Tersteeg]

A couple are particular standouts, and Im sure there are more, but I recall NAB direct dont like IO on PPOR, and Heritage is another.

Heritage don't seem to like anything but the most basic loans.

 

[Aaron_C]

Heritage don't seem to like anything but the most basic loans.

lol so true Peter! The only people who seem to service with Heritage are first home buyers with no debts or people who earn $1m a year. Definitely not for investors - which is a real shame since they have some good niches.

 

[Rolf Latham]

Heritage don't seem to like anything but the most basic loans.

HBS used to be a flexible lender.

HDTS, 7 units on title in 2 horse one pub towns etc ......................

These days well, they are hard work

ta

rolf

 

[Token Funder]

HBS used to be a flexible lender.

HDTS, 7 units on title in 2 horse one pub towns etc ......................

These days well, they are hard work

ta

rolf

That's a surprise given the good quality stuff you were giving them

 

[tobe]

If you're looking to rent out a single room, I don't know that I'd use an interest only loan to treat it as an investment. The gearing benefits are likely to be minimal and you'd loose some of the capital gains advantages if you sell.

Always wondered about this. Personally I prefer the bird in the hand of NG to the bird in the bush of CG.

However, Im also wondering if you didnt declare the boarder income, and also the rental deductions, could you get in trouble with the tax office if they found out?