We own our PPR outright, have no debt and a fairly substantial amount of cash available. We have two IPs, with I/O loans. We plan to buy another IP: Should we go with a 100% I/O loan or put a deposit down and pay P&I with a significant sum in an offset account, which should result in us owning the property in c.20years at similar repayments to the I/O loan. Then we'd own the property and have an income stream or sell and get the principal plus any capital growth, rather than just relying on capital growth. Would it make sense to go with the P&I option?
P&I loan for investment property?
- Thread starter sustainadelic
- Start date
Its always good to pay down debt.
But it can be better to use the IO with offset strategy, if you are disciplined, for a few reasons such as:
1. Saves the same amount of interest
2. Keeps cash available for private expenses, and makes the interest on these private expenses deductible.
3. Allows you to potentially retire early by using cash savings first while waiting for rents to increase.
4. Allows cash for emergencies
5. allows cash to repay the loan for months and months (years possibly) should you have no income coming in.
But it can be better to use the IO with offset strategy, if you are disciplined, for a few reasons such as:
1. Saves the same amount of interest
2. Keeps cash available for private expenses, and makes the interest on these private expenses deductible.
3. Allows you to potentially retire early by using cash savings first while waiting for rents to increase.
4. Allows cash for emergencies
5. allows cash to repay the loan for months and months (years possibly) should you have no income coming in.
My concern is we might be buying near the top of this market cycle if we buy now so paying off the principal assures us of a future return (or an ongoing income stream from rent) even if there is little/no capital growth. IF you took the view that there might be a bubble or at least a correction in property prices, would that make the P&I option more attractive?
350K property I/O 100% loan + 150K in offset or
350K property P+I 80% loan + 80K in offset
350K property I/O 100% loan + 150K in offset or
350K property P+I 80% loan + 80K in offset
If you can see yourself purchasing a new PPOR at some point in the future, perhaps it would be beneficial to pay interest only and put all your surplus cash into an offset account. This would probably give you a better result when you did purchase that new PPOR.
If you can't see yourself making that purchase, then P&I probably isn't going to hurt.
Paying down debt is always a good thing, just make sure your planning to pay down the non deductible first.
If you can't see yourself making that purchase, then P&I probably isn't going to hurt.
Paying down debt is always a good thing, just make sure your planning to pay down the non deductible first.
Hi sustainadelic
Do you think you'll ever purchase another PPOR in the future? If so - will you require a loan for it?
If the answer is yes - then prob best to set up the next IP loan as IO and park all the spare cash in the offset. You can then use this cash towards your next PPOR later on.
If you won't end up buying another PPOR - then paying down debt makes sense IMO.
Cheers
Jamie
Do you think you'll ever purchase another PPOR in the future? If so - will you require a loan for it?
If the answer is yes - then prob best to set up the next IP loan as IO and park all the spare cash in the offset. You can then use this cash towards your next PPOR later on.
If you won't end up buying another PPOR - then paying down debt makes sense IMO.
Cheers
Jamie
On a different note - if you're worried about buying at the top of the market, why not reduce your risk and buy elsewhere? Or wait?
That wouldn't really change much.
But something like this could.
$100,000 purchase, $80,000 loan PI.
Bubble bursts after 1 year and the property is now worth $70k. Lose job just as tenants vacate. Loan is now $78,000 and you have no cash to pay the loan. You miss 2 repayments and get a credit default. You cannot refinance.
v
$80K loan IO, everything else the same except you have saved up 3 months worth of interest payments in the offset. You lose your job but use the offset to pay the loan for 2 months. Higher loan balance, but you have no missed payments.
The effect is almost the same overall, but no missed payments of credit blemish with the 2nd
P&I vs I/O is really a no-brainer IMO.
Agree with the above comments... There really isn't anything to be gained by P&I.. So perhaps you are better off I/O to keep your options open!
Edit: @unloadmymind, was unclear before.
There are people out there using IO for all the wrong reasons, or worse, people that shouldn't be using LOCs instead of home loans.
Their financial behaviour is poor and they get nowhere with their debts.
The best financial decision is not always the best decision for someone to make. Most humans, particularly the uninformed and the disengaged from investments, aren't calculators.
There are people out there using IO for all the wrong reasons, or worse, people that shouldn't be using LOCs instead of home loans.
Their financial behaviour is poor and they get nowhere with their debts.
The best financial decision is not always the best decision for someone to make. Most humans, particularly the uninformed and the disengaged from investments, aren't calculators.
So have I got this right?
With a P&I with offset, the monthly repayments stay the same (as with no offset a/c) but the loan is paid off sooner.
But with an I/O loan the offset actually reduces your monthly repayments.
So then I could put the monthly savings back into the offset (increasing the offset and presumably reducing repayments further) and eventually use the accumulated amount in the offset to pay off the principal - effectively the same as the P&I loan. Or, when I sell the property, the extra cash I've accumulated in the offset will equal in value the amount of principal I would have acquired with a P&I loan.
So are the two methods effectively the same (as long as I put the I/O offset savings back into the offset)?
Then what's the advantage of the I/O ... is it that with the I/O I have the choice to pay less in any given month (if I have cashflow difficulties if, say, the property is untenented for a few weeks)? And/or that I can invest the offset cash elsewhere if there's better returns in say, sharemarket?
Finally, for tax, it's only the interest proportion of the loan that is tax deductible, right? So with P&I with offset, I might be repaying $1500pm but only say $1000 would count as tax deductible. With the I/O, the offset would reduce $1500 to $1000, all deductible, so again, effectively the same.
Sorry if these are dumb questions, I'm just trying to get my head around this stuff.
With a P&I with offset, the monthly repayments stay the same (as with no offset a/c) but the loan is paid off sooner.
But with an I/O loan the offset actually reduces your monthly repayments.
So then I could put the monthly savings back into the offset (increasing the offset and presumably reducing repayments further) and eventually use the accumulated amount in the offset to pay off the principal - effectively the same as the P&I loan. Or, when I sell the property, the extra cash I've accumulated in the offset will equal in value the amount of principal I would have acquired with a P&I loan.
So are the two methods effectively the same (as long as I put the I/O offset savings back into the offset)?
Then what's the advantage of the I/O ... is it that with the I/O I have the choice to pay less in any given month (if I have cashflow difficulties if, say, the property is untenented for a few weeks)? And/or that I can invest the offset cash elsewhere if there's better returns in say, sharemarket?
Finally, for tax, it's only the interest proportion of the loan that is tax deductible, right? So with P&I with offset, I might be repaying $1500pm but only say $1000 would count as tax deductible. With the I/O, the offset would reduce $1500 to $1000, all deductible, so again, effectively the same.
Sorry if these are dumb questions, I'm just trying to get my head around this stuff.
P&I repayments have a minimum amount based on the original loan amount, limit and interest rate. Money in the offset account doesn't change the repayment amount, but it does mean you pay less interest and more principal. You'll own the property sooner.
I/O repayments are based on the amount owing and the interest rate so they do adjust depending on how much is in the offset account. It's worth noting that after the I/O period has expired the repayments become P&I over the remaining loan term, based on the original limit.
There are exceptions to all of the above, but most lenders follow that format.
One advantage of I/O repayments is that your minimum obligatory repayment is lower than P&I. You can opt to pay more but you don't have to. With P&I your minimum payment is higher. This can help with cash flow if things get tight.
It tends to be the interest part of the loan that's tax deductible, not the principal. It's generally fairly easy to get a figure from your bank of how much interest you paid across the year for tax purposes, even with a P&I loan.
I/O repayments are based on the amount owing and the interest rate so they do adjust depending on how much is in the offset account. It's worth noting that after the I/O period has expired the repayments become P&I over the remaining loan term, based on the original limit.
There are exceptions to all of the above, but most lenders follow that format.
One advantage of I/O repayments is that your minimum obligatory repayment is lower than P&I. You can opt to pay more but you don't have to. With P&I your minimum payment is higher. This can help with cash flow if things get tight.
It tends to be the interest part of the loan that's tax deductible, not the principal. It's generally fairly easy to get a figure from your bank of how much interest you paid across the year for tax purposes, even with a P&I loan.
