Loans - IO vs I+P loans

[Futurist]

Hey all,

Question about finance and loans.
For an investment property, is it true that alot of investors aim for IO loans. Most banks provide 5 year IO, then I+P for the remaining period. Some have started oferring 10 years IO.

My question is, after the 5 years.. what do investors do?
Do they negotiate for another period of IO. Or do they go I+P payments?

Are the banks lenient in offering IO period after period for investment loans ?
Or will there be a point in time where they will say NO, give us the principal payments! ?

 

[Aaron_C]

Most people ask for an extension of the IO period. If this is not given, they go to P&I and many of them choose to refinance their loans to another lender for IO.

 

[Rolf Latham]

Some have started oferring 10 years IO.

A few will do 15 for the right borrower and lvr, maybe not straight up, but certainly many will renew without a new loan app.

The caveat here is that some are quite strict and want a new loan app and vals etc every time u renew, with some others its as simple as a phone call or ticking a box in net banking.

ta

rolf

 

[Paul Thewlis]

A side point here. You talk about investors doing IO loans. In my view all borrowers should be applying for IO loans for as long as possible (and as Rolf said 15 years is available) unless they see a P&I loan as some sort of enforced savings method.

IO only loans:
1. Keep your monthly commitment down as low as possible because you don't have to pay the principle part
2. Allow you to pay principle at your own rate because you can make additional payments into the loan
3. Allow you to redraw ALL principle paid into the loan if you want - eg for deposit on next property or in case of an "emergency" situation.

It is my view that borrowers should effectively ignore the interest rate changes. They should set up their own long term monthly repayment based upon the longer average interest rate. In this way they set up their financial position based on the long term position and are not affected by RBA/bank changes.

In short when the bank's minimum repayment amount is lower than your own set point for repayment amount you are adding to your redraw and providing a "fighting fund" for when rates push your monthly repayments higher. When that happens you are able to drawback on your loan when the rate cycle takes your payments above the amount you've set for yourself.
Regards
Paul

 

[BMan]

A side point here. You talk about investors doing IO loans. In my view all borrowers should be applying for IO loans for as long as possible (and as Rolf said 15 years is available) unless they see a P&I loan as some sort of enforced savings method.

IO only loans:
1. Keep your monthly commitment down as low as possible because you don't have to pay the principle part
2. Allow you to pay principle at your own rate because you can make additional payments into the OFFSET ACCOUNT
3. Allow you to redraw ALL principle paid into the OFFSET ACCOUNT if you want - eg for deposit on next property or in case of an "emergency" situation.

It is my view that borrowers should effectively ignore the interest rate changes. They should set up their own long term monthly repayment based upon the longer average interest rate. In this way they set up their financial position based on the long term position and are not affected by RBA/bank changes.

In short when the bank's minimum repayment amount is lower than your own set point for repayment amount you are adding to your redraw and providing a "fighting fund" for when rates push your monthly repayments higher. When that happens you are able to drawback on your loan when the rate cycle takes your payments above the amount you've set for yourself.
Regards
Paul

just fixed your posts slightly
theres no need to use redraw or put money into the loan unless its your PPOR and you want to access equity out of it for an IP (changing non deductible debt to deductible debt)

the reason you wouldnt want to use redraw is then its under the control of the banks and if you redraw for personal use it then contaminates the tax deductions

 

[Peter_Tersteeg]

just fixed your posts slightly
theres no need to use redraw or put money into the loan unless its your PPOR and you want to access equity out of it for an IP (changing non deductible debt to deductible debt)

the reason you wouldnt want to use redraw is then its under the control of the banks and if you redraw for personal use it then contaminates the tax deductions

To clarify this, if you're using funds from your PPOR to purchase an IP, you should set up a separate loan account and redraw funds from that loan account to pay a deposit for your IP.

You use an offset account with your PPPOR to reduce interest if there is a possibility that the PPOR will become an IP at some future point. If the PPOR will never become an IP, then I'd have some funds in an offset, but I'd make regular extra payments directly on the loan (less chance of spending your redraw on a big night out on the town when compared to an easily accessable offset account).