LOAN: Interest only versus Principle and Interest

[bobby85]

Hi all,

I was contemplating my next property purchase.
I've been structuring all my current loans as P+I (main reason is that my current income allows it and I'm not too concerned about positive cash flow at the moment).

I did the calculations last night and I'm getting quite close to my comfort zone for cashflow limit so I've decided to go Interest only on my next loan.

I was wondering if most lenders tend to:
- lend the same amount
- change the interest rate

Any tips would be appreciated.
I will be speaking with my lender on Monday to get further information and will let you know what I'm advised.

 

[Terry_w]

No difference in borrowing really. Some lenders tend to prefer PI on 95% LVR but generally you won't find any difference.

If you have non deductible debt then PI will be costing you money, but if you don't have any non deductible debt then it is always good to pay down debt.

 

[Corey Batt]

Almost all mainstream lenders these days don't have price differentiation between P&I and interest only.

Do you have any non deductible debt still, ie PPOR?

If you do, it would be better to have the existing portfolio of investments run at interest only and redirect the excess cash flow into the non deductible debt. Or if you are already personal debt free, keep on sailing forward.

 

[twodogs]

I only ever have IO loans, simply as it is me and not the bank that can determine how, where and when any principle is paid. This allows complete control of deductible and non-deductible debt, redraw and the purpose of the redraw and paying down debt when it is best to do so.

I have never paid a higher rate because of IO loans.

Caveat: Of course this approach cannot apply when you wife doesn't understand.

 

[Wirra436]

I've been structuring all my current loans as P+I (main reason is that my current income allows it and I'm not too concerned about positive cash flow at the moment).

Hi Bobby,

I was in the same boat as you, because my income was higher I figured pay down the debt and structure everything P&I.

But it got to the point by the 4th IP it was starting to get a little tight with payments.
I have now changed all my loans to IO, this allows me to have more cash-flow available to invest.

The banks I have my loans with did not change interest rates when I switched to IO payments. I have no PPOR only Investments, but speak with your Broker if you have one, he/she will be able to assist and determine what is better for your current situation.

Cheers

Wirra

 

[bobby85]

Almost all mainstream lenders these days don't have price differentiation between P&I and interest only.

Do you have any non deductible debt still, ie PPOR?

If you do, it would be better to have the existing portfolio of investments run at interest only and redirect the excess cash flow into the non deductible debt. Or if you are already personal debt free, keep on sailing forward.

I'm currently staying in an apartment as a PPOR but plan on renting it out next year.
Thanks for the tips!

 

[bobby85]

But it got to the point by the 4th IP it was starting to get a little tight with payments.
I have now changed all my loans to IO, this allows me to have more cash-flow available to invest.

The banks I have my loans with did not change interest rates when I switched to IO payments. I have no PPOR only Investments, but speak with your Broker if you have one, he/she will be able to assist and determine what is better for your current situation.

Cheers

Wirra

Thanks for the help and advice everyone.

Wirra, I'm also onto IP no.4 and found cashflow is tightening up with P+I on all of them. Plus I'm no longer negative geared so it's not really working for me anymore. I calculated I'm paying down debt over $30,000/year unnecessarily.
Thanks for sharing your advice!

 

[bobby85]

Caveat: Of course this approach cannot apply when you wife doesn't understand.

No wiser words have been spoken.

 

[Peter_Tersteeg]

For about 75% of lenders, P&I or I/O either doesn't affect the serviceability calculations or P&I actually has a slight advantage for the lenders calculations.

For the other 25% of lenders, I/O repayments will deliver significantly better serviceability results than P&I repayments.

Additionally that 25% group of lenders will consistently have significantly better servicing for investors with 3 or more investment properties than the other 75 of lenders. This might mean that some lenders won't lend another dollar, but there's others that might still be willing to lender millions more.