Is IO loan the better way to invest in property than PI?

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pipsal

I am signing up for a PI loan now, of about 370000 and will be living in the house for the 6-12mths for FHB, but after that I will probably rent it out to help pay it off. My long term goal is to have several IP's so that I can retire when I want to (still young-ish, 29yo next week, so I have some time. But I am impatient! I have been wanting to do this for so many years but never had the courage to just buy something that I now want to keep it rolling....so, when the living requirements are fulfilled, what is my best option?

Keep paying PI loan and using rent to help out/pay a bit extra (cos the loan may be a bit of a stretch when interest rates go up). Or is it better to go IO so that I could potentially borrow a bit more to fund another rental property? But am I gaining any real equity in the property? What is the smarter long term move? I thought IO was no good, but have seen that a lot of investors use it.
 
in my opionion, i use an IO loan to be able to give me a better servicability, as they are cheaper, each month to service,
when i look at a statement , way back when! our PI loan looked like we were paying of the property by only $30 wk, the mortgage back then was 100k,
as property prices increase , over a ten year time frame , the home was worth 200k, and we paid of 15k big deal!!!
i would have been able to negetive gear another home , instead, and would have had 200k in equitys by then, so now even our own home is IO, i hope this helps, ?
 
Thanks for the responses. That thread was very informative Proportunity.

So next question....given the current economic climate, and the predictions that property may drop dramatically, or even at all, in price over the next couple of years then is now a good time to be buying in to it? Even if I was to do a IO loan I would not be gaining much equity/capital in that time, maybe even losing a lot. Is IO still the best way to go?

I was intending to use rental income to put solely onto the loan also, so that it will be like another 2/3 or so payment each fortnight. Builds up equity faster, but is it fast enough?

Also, do you have to have 20% deposit for IO loans? A few ppl have mentioned needing to get this before they get their next IP....

Thanks so much again - I have learnt SOOO MUCH over the past few weeks on this forum...thought I knew it all, had the strategy to buy one, rent it out and use rent to make extra payments, plus negative gearing. Never knew about this depreciation stuff, and never would have dreamt to consider IO loa only!
 
I am someone who is all for paying off my debt, and previously would NEVER have even entertained the idea of an IO loan - I mean who wants to owe the same amount of money in five years as they do now?

Well, after LOTS of research and discussion and debate, and more research, and more discussion and debate, and sitting down and talking with a financial advisor and an accountant - I must say I have been converted. That is not to say that an IO loan is for everyone, But in my situation, an IO loan with 100% offset account makes the most financial sense.

Particularly, when it was pointed out to me that I could put the extra money that I would have paid on the loan, to cover the principle, into the offset account. Essentially paying the loan as if it were P&I, but getting the benefits of flexibility in repayments, and being able to 'redraw' this money from the offset account without it affecting my tax deductability of the interest.
 
pipsal said:
So next question....given the current economic climate, and the predictions that property may drop dramatically, or even at all, in price over the next couple of years then is now a good time to be buying in to it?
Click to expand...
Who is predicting major falls? I'm buying. You make your own decisions.

pipsal said:
Even if I was to do a IO loan I would not be gaining much equity/capital in that time, maybe even losing a lot. Is IO still the best way to go?
Click to expand...
Yes IMO - unless the market "tanks" significantly and the lenders start getting edgy.

pipsal said:
I was intending to use rental income to put solely onto the loan also, so that it will be like another 2/3 or so payment each fortnight. Builds up equity faster, but is it fast enough?
Click to expand...
Fast enough for what? My CG strategy on a $xM property portfolio will beat your savings strategy hands down, most years.

pipsal said:
Also, do you have to have 20% deposit for IO loans?
Click to expand...
IO loans have nothing to do with the amount of deposit

pipsal said:
A few ppl have mentioned needing to get this before they get their next IP....
Click to expand...
After you get a few IPs under your belt most investors and lenders use 20% deposits on new purchases. Notwithstanding that the 20% deposits are really drawn down from equity in other IPs - so it is 100% finance + costs for all intents and purposes.

pipsal said:
Thanks so much again - I have learnt SOOO MUCH over the past few weeks on this forum...thought I knew it all, had the strategy to buy one, rent it out and use rent to make extra payments, plus negative gearing. Never knew about this depreciation stuff, and never would have dreamt to consider IO loa only!
Click to expand...
Welcome to a whole new world of possibilities.
 
Very well asked question. Lots of people write into this forum asking the same question but I think the way you have worded it is actually coming from someone who has done a bit of research.

It is a very dificult question to answer. I have been investing since 2001 so my response is going to be very different from someone who has only invested from, say 2005....

I have a varied structure: ppor is PI, #1 was IO but i was too lazy so now is unfortuately V @ 4,99!. #2is still in IO fixed due to come out in October 7.19%. #3 P&I. Was supposed to be IO but the bank made a mistake that I didn't pick up in time. Very happy about that outcome, because it is in a mining town and would like to build up as much equity as possible. #4 is IO but mixed resi and commercial. Add to that a few LOC's at variable.

So in the long run it would look like you'de be better off variable, but I know you may not be.

You obviously have brains in the right place. Sometimes it just takes guts.

I won't even excuse my opinion

Cheers

V

Churchblock rules
 
That's right. What I was trying to convey in my ramblings was that there are many variables and what is right for one person may not be right for another. All methods can work depending on your personal circumstances.

I have a mix of IO and P&I, fixed and variable. P&I - you get to build up a bit of equity but not much over the long run, and IO you get more cash in hand to either pay off or use on other loans.
 
pipsal said:
Even if I was to do a IO loan I would not be gaining much equity/capital in that time, maybe even losing a lot. Is IO still the best way to go?

I was intending to use rental income to put solely onto the loan also, so that it will be like another 2/3 or so payment each fortnight. Builds up equity faster, but is it fast enough?
Click to expand...
"Fast enough" for what? :confused:

In any case, if you pay P&I amortised over 25 years, in Year 1, you will pay approximately 1.8% off the principal. I should hope that, on average, capital growth would increase your equity by substantially more than that! If you're relying on paying down your debt to increase your equity, then you're not investing, you're saving. For a PPOR, this may be a good strategy, but if you consider it the best strategy for an investment, then I'd question whether you've chosen your investment well. Growth in value of your investment should be creating equity for you, rather than decreasing leverage, otherwise the investment isn't performing, and you may as well just be putting money into a savings account.

If the investment performs and grows, your LVR naturally drops with time. For example, if you're 90% leveraged at purchase, owing $90K on a $100K unit, then after a few years and 30% cumulative growth, you owe $90K on a $130K unit and your LVR has dropped to 90/130 ~ 69%. If you felt this investment was sound at 90% on purchase, why would you be unhappy with 69% a few years later, and feel the need to aggressively reduce debt further? :confused:

If you do feel the compulsion to have a buffer, you can put the "principal" in an offset account and achieve the same end, but retain flexibility to access that money if you need it for an alternative purpose.

There really are no advantages to P&I over "I/O plus offset". I know somebody is going to say that P&I offers enforced discipline. This is true, but if you are the kind of person who can only save when "forced", and can't divert the "principal" to the offset and trust yourself not to fritter it, then I'd respond that you have far bigger problems to address before you begin investing, than which loan product to use.
 
The simple answer is that IO is better than PI in almost all circumstances.

Its like whats better, xcoll or no xcoll. In most cases non xcoll works better.

In both cases you will get opinions on the majorty on one side and the minority on the other.

In the end, opinions dont matter, results do. This means that if you decide PI is better for you then thats fine too

ta
rolf
 
As Rolf mentioned no 1 hat fits all it is down to personal choice.

All I would say is IO with 100% offset will gives you flexibility down the track if the PPOR becomes an IP and you suddenly have to borrow more non deductible debt again.
 
Thats a good point.

If you keep moving into the next place and making ur previous PPOR an IP then u keep ur deductables at the max. and u just move ur offset funds against the new PPOR.
 
a little of the topic, but does borrowing at a higher LVR for a PPOR and parking a large sum in the offset account reduce your borrowing capacity moving forward (future IP purchases)?


e.g

New PPOR costs 400k.
current PPOR soon to be IP has 300k in offset.

New PPOR is purchased at 90% LVR (new loan for 360k) and the rest is parked in the offset (260k)

as opposed to using more funds for a deposit?
 
So in the end it is really better to pay off your PPOR If you want to purchase future IP's, instead of having all the money sitting in your Offset account reducing your interest bill.
 
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