Lets hope ur lender allows same, or you can shift to another lender.
IO periods and IO extensions arent created equal.
One lender tick and flick, another moderate low level renewal, another full app.
ta
rolf
P&I or IO after 5 years?
- Thread starter jmillar
- Start date
Lets hope ur lender allows same, or you can shift to another lender.
IO periods and IO extensions arent created equal.
One lender tick and flick, another moderate low level renewal, another full app.
ta
rolf
IO with offset every time.
Unless, as Rolf points out, poor money managers are at the helm.
BR
Unless, as Rolf points out, poor money managers are at the helm.
BR
Cross collateralization
Hi there,
In last 18 months I both two investment properties worth 1 million on 95% loan but later I figured out the second purchase was cross collateralized with first.
What to do?
Should I change it? Which is not easy as I paid LMI on it.
Any suggestions from experienced investors
Hi there,
In last 18 months I both two investment properties worth 1 million on 95% loan but later I figured out the second purchase was cross collateralized with first.
What to do?
Should I change it? Which is not easy as I paid LMI on it.
Any suggestions from experienced investors
Last edited:
Prepare and wait for the equity to increase or make some equity growth
I assume the 95 was by necessity and not by choice ?
At
Rolf
I assume the 95 was by necessity and not by choice ?
At
Rolf
You would have paid less LMI if you had stand alone structure as well.
Not making you feel bad as you would not have known because who ever set the loans up either didnt know or didnt care enough to give you the choice?
Sorry abit off topic, regarding the IO after 5yrs...
Currently i have 2 investment loans with CBA, both IO for 5yrs.
Say the 5 years is approaching, do i need to fill in any additional forms/questionnaires to add another IO 5 yrs?
Does CBA do a re assessment of my loans, etc?
What actually happens?
(sorry this is a noob questions, but would like to kno the banks perspective so that i am prepared).
Currently i have 2 investment loans with CBA, both IO for 5yrs.
Say the 5 years is approaching, do i need to fill in any additional forms/questionnaires to add another IO 5 yrs?
Does CBA do a re assessment of my loans, etc?
What actually happens?
(sorry this is a noob questions, but would like to kno the banks perspective so that i am prepared).
CBA are unlikely to require a reassessment, they're generally fairly good for rolling over to another 5 year I/O period.
Personally I have a combination of I/O and P&I. My cash-flow is fairly good as are my equity levels so I've got plenty of options and I would actually like to pay down debt over time. I don't disagree with the general I/O consensus either, I'm just doing what suits me.
Personally I have a combination of I/O and P&I. My cash-flow is fairly good as are my equity levels so I've got plenty of options and I would actually like to pay down debt over time. I don't disagree with the general I/O consensus either, I'm just doing what suits me.
My general advice to clients is IO while they build a portfolio, then once they are comfortable with the asset level that will generate their retirement income, then start paying down debt. Wealth, after all, is assets less liabilities and while a 100% offset can and does work, at a point in time paying down principal should be done.
The offset should be set against the PPOR first and once that matches the PPOR loan, then an offset against an IP but I would not routinely set offsets against IP's as it limits the number of lenders and often is at a higher cost in terms of fees.
I generally use 5 years IO as the initial term, otherwise servicing calculators can become an issue and as Rolf said, a number of lenders are happy to roll over with a minimum of effort, others require more which then makes it a good time to review the loan/lender anyway.
That said, some clients want to pay P&I and others need to because of poor spending habits.
The offset should be set against the PPOR first and once that matches the PPOR loan, then an offset against an IP but I would not routinely set offsets against IP's as it limits the number of lenders and often is at a higher cost in terms of fees.
I generally use 5 years IO as the initial term, otherwise servicing calculators can become an issue and as Rolf said, a number of lenders are happy to roll over with a minimum of effort, others require more which then makes it a good time to review the loan/lender anyway.
That said, some clients want to pay P&I and others need to because of poor spending habits.
I think this is good advice.. Paying down debt is always good.
I would just remind the clients that there is the possibility of upgrading their home down the track and if this is done they would ideally want to use cash instead of debt as the interest wouldn't be deductible.
I just signed up here and this is my first post so go easy on me becuase I have a lot to learn but wondering what the difference is between:
an Interest Offset and Principal and Interest.
I understand that with PI you are reducing your debt but isn't one just doing the same with a Interest Offset payment?
or is it that with a Interest Offset payment you are not paying down debt but saving equity that could be used to service the debt and as a reward the bank is only charging you Interest on what reducing amount of debt you had if you were paying it down?
adding to this, if this is the case and please correct me if i am wrong, but would the lender be charging you a (slightly?) higher IR for not actually paying down the debt?
Thanks so much. I'm looking forward to engaging in this community as I'm certain i can learn a lot from you. kr
an Interest Offset and Principal and Interest.
I understand that with PI you are reducing your debt but isn't one just doing the same with a Interest Offset payment?
or is it that with a Interest Offset payment you are not paying down debt but saving equity that could be used to service the debt and as a reward the bank is only charging you Interest on what reducing amount of debt you had if you were paying it down?
adding to this, if this is the case and please correct me if i am wrong, but would the lender be charging you a (slightly?) higher IR for not actually paying down the debt?
Thanks so much. I'm looking forward to engaging in this community as I'm certain i can learn a lot from you. kr
It's not 'interest offset', it's 'interest only'.
First you need to understand the PRINCIPAL refers to the amount of money you owe on the loan.
With PRINCIPAL & INTEREST repayments, when you make a payment, that payment consists of both principal and interest components. This means that the amount you owe reduces every time you make a payment. Initially most of the amount you pay is made up of interest so the loan will reduce very slowly. As you pay off more of the loan, the amount paid starts to increase the principal and reduce the interest components.
With INTEREST ONLY repayments, you only pay interest on the loan amount each pay period. You are not reducing the amount you owe, the loan will never reduce.
The interest rates are the same in either case.
An OFFSET ACCOUNT is a different thing. This is a savings account. Instead of earning you interest on your savings, it applies the balance of your offset account against the loan principal when the monthly interest is calculated.
If the loan is Principal & Interest, having money in the Offset account will mean more of the repayment is Principal and less is interest.
If the loan is Interest Only, having money in the Offset account means the interest only payment is reduced.
First you need to understand the PRINCIPAL refers to the amount of money you owe on the loan.
With PRINCIPAL & INTEREST repayments, when you make a payment, that payment consists of both principal and interest components. This means that the amount you owe reduces every time you make a payment. Initially most of the amount you pay is made up of interest so the loan will reduce very slowly. As you pay off more of the loan, the amount paid starts to increase the principal and reduce the interest components.
With INTEREST ONLY repayments, you only pay interest on the loan amount each pay period. You are not reducing the amount you owe, the loan will never reduce.
The interest rates are the same in either case.
An OFFSET ACCOUNT is a different thing. This is a savings account. Instead of earning you interest on your savings, it applies the balance of your offset account against the loan principal when the monthly interest is calculated.
If the loan is Principal & Interest, having money in the Offset account will mean more of the repayment is Principal and less is interest.
If the loan is Interest Only, having money in the Offset account means the interest only payment is reduced.
Thx for the reply. I probably didn't articulate my question very well and used the IO abbreviation incorrectly as I'm only concerned with understanding the purpose of an offset account.
Given what you said would a person generally earn more in interest by saving than they would by offsetting and reducing their debt service pi or io?
If so are their any tax implications and would offsetting mean that you wouldn't be paying tax vs paying tax on interest if it is considered an income?
Thx again
Given what you said would a person generally earn more in interest by saving than they would by offsetting and reducing their debt service pi or io?
If so are their any tax implications and would offsetting mean that you wouldn't be paying tax vs paying tax on interest if it is considered an income?
Thx again
Whatever amount you have in the offset has the exact same effect as having the same amount paid off your loan (assuming it is a 100% offset account).
If you have a $300k loan and pay off $100k, you will pay interest on $200k.
If you have a $300k loan and have $100k sitting in an offset, you will pay interest on $200k.
The only difference is that the money in the offset can be accessed by you at any time for any purpose and the loan still stays fully deductible. If you pay off the loan and then draw it down for use somewhere else, it will only be tax deductible if it is for another investment.
Offsets provide the same benefit as paying off the principal, except it has heaps more flexibility.
BR
If you have a $300k loan and pay off $100k, you will pay interest on $200k.
If you have a $300k loan and have $100k sitting in an offset, you will pay interest on $200k.
The only difference is that the money in the offset can be accessed by you at any time for any purpose and the loan still stays fully deductible. If you pay off the loan and then draw it down for use somewhere else, it will only be tax deductible if it is for another investment.
Offsets provide the same benefit as paying off the principal, except it has heaps more flexibility.
BR
