P&I or IO after 5 years?

[jmillar]

The consensus within the investing community is to purchase properties with IO loans which I believe to have merit and I have done as it was particularly attractive to my situation.

Just wondering though if after the initial 5 years, people renew the loan as IO or let it roll over to P&I.

Obviously this would depend on one's goals and circumstances - I suppose keeping IO would allow more cash flow to continue investing, while going to P&I will let the property pay itself off and remove its own mortgage at the end of the period, which may make it easier to transfer to SMSF if in a unit trust etc.

I assume IO may be best if you want to continue investing, while P&I is good if you have bought your set amount of properties and would like to let them pay themselves off so that in the future you can have $X amount of unencumbered properties bringing in $X amount of passive income.

Would love to hear your opinions on this.

I included a poll, because, well who doesn't love colourful graphs and stuff?

John

 

[D.T.]

IO for life.

 

[alexlee]

IO with offset. If you're at the stage when you want to reduce interest payments (note that I didn't not say 'if you want to reduce debt'), add the extra cashflow to the offset account(s) instead. Why? Because you never know when you simply can't borrow money anymore (e.g. when you 'retire'), and you still want the option of accessing 'equity' without selling the asset, no matter what you use the money for. IO with offset offers minimum payments and maximum flexibility.

 

[Rolf Latham]

IO 4 eva with 100 % offset UNLESS the borrower displays poor money habits in which case accelerated P&I will work better

ta
rolf

 

[Nth Brisbanite]

IO only for life for me. It allows me to maximise my borrowing and in turn wealth creation.

 

[alexlee]

Say you have 5 properties, with 5 loans. Is it better to go P&I on all of them, or IO on all of them and put the 5 lots of P amounts into one of the offsets? Clearly, the second option gives you much more flexibility.

 

[alexlee]

I assume IO may be best if you want to continue investing, while P&I is good if you have bought your set amount of properties and would like to let them pay themselves off so that in the future you can have $X amount of unencumbered properties bringing in $X amount of passive income.

A property doesn't have to be unencumbered (in the sense of having no mortgage) for interest to be zero.

Don't be too fixated in the SMSF strategies. You have a LOT of years before you hit preservation age, and no one knows what it will be when you get there anyway (my guess: it's going to increase). A 30 year plan, on an increasing income and diligent investing, will yield a lot of wealth. For you, even after 30 years you'll still be a long way from preservation age.

By then, you may well have a wife and kids. Instead of super, trusts may be more useful to you.

 

[Rixter]

IO way to go! Why someone would opt to P&I to pay down the non tax deductible principle from after tax savings thereby reducing their cash flow is beyond me.

Savings is still savings no matter where you park it. It doesnt make the property worth any more in value.

 

[jmillar]

Thanks alot guys, some great advice as per usual which helped challenge my thinking!! Much appreciated.

Enjoy your weekends.

 

[Terry_w]

IO for life.

You're not part of that gang are you?

IO4Life tattoos on their arms - members go around hassling people who have their loans PI. My mate was tackled to the ground by a few of them last week. They said "your change you loans to IO or you are going to pay that mother ****er off in no time!" He was so scared he changed his loans to IO for a 15 year term!

 

[skater]

I would say don't get too hung up on it. Do what you 'have' to do.

For instance, most of mine are IO, but I've got others that are P & I. I didn't want P&I, but basically had no choice due to one of the banks that I have. The loans with that bank are Trust properties and my ex-PPOR. All of which were hard to move, so I've just left them where they are. The extra payments aren't all that much and our income is sufficient that it hasn't hindered further purchases.

The ex-PPOR was in the too hard basket because I got a brilliant valuation on it a while back, and being a dual occ with few comparables, it was just easier to leave it alone. Of course, that said, prices have moved now & I just haven't got around to doing something about this property. I've got others that I'm pulling equity out of first.

 

[wategos]

My share loans have always been IO, but property always P&I, I prefer to see the.debt on property go down, margin loans I'm more comfortable with.

 

[D.T.]

My share loans have always been IO, but property always P&I, I prefer to see the.debt on property go down, margin loans I'm more comfortable with.

Thats the opposite of most of us - is that just because you have more experience with the asset class?

 

[Rolf Latham]

Thats the opposite of most of us - is that just because you have more experience with the asset class?

More usually it's because people haven't been shown that io with 100% offset is pi at the borrowers option

Ta

Rolf

 

[The Fence]

More usually it's because people haven't been shown that io with 100% offset is pi at the borrowers option

Ta

Rolf

...and that wategoes is contrary to most on here.

How a IO margin loan on shares can be "safer" than an IO loan on a property I dont know.

Care to enlighten us wategoes?
id really like to know.

 

[wategos]

...and that wategoes is contrary to most on here.

How a IO margin loan on shares can be "safer" than an IO loan on a property I dont know.

Care to enlighten us wategoes?
id really like to know.

My lvr is only 25%, the returns are higher, the interest rate lower (though not with most Australian ripoff margin rates) and in the current environment I consider the downside risk lower in stocks.
Plus I've been investing in the stock market since 16 years old but didn't start with property until late 20s so stocks are something I'm more comfortable with.

 

[Edmond Dantes]

IO 4 eva with 100 % offset UNLESS the borrower displays poor money habits in which case accelerated P&I will work better

ta
rolf

Great advice.

 

[jonmardell]

the best option to keep your options open is to have an offset account against the loan and transfer monthly the calculated P&I figure into that offset account. This way the interest is reducing in line with a P&I loan but you can have that cash available at a later point in time for any purpose.

The consensus within the investing community is to purchase properties with IO loans which I believe to have merit and I have done as it was particularly attractive to my situation.

Just wondering though if after the initial 5 years, people renew the loan as IO or let it roll over to P&I.

Obviously this would depend on one's goals and circumstances - I suppose keeping IO would allow more cash flow to continue investing, while going to P&I will let the property pay itself off and remove its own mortgage at the end of the period, which may make it easier to transfer to SMSF if in a unit trust etc.

I assume IO may be best if you want to continue investing, while P&I is good if you have bought your set amount of properties and would like to let them pay themselves off so that in the future you can have $X amount of unencumbered properties bringing in $X amount of passive income.

Would love to hear your opinions on this.

I included a poll, because, well who doesn't love colourful graphs and stuff?

John

 

[Colin Rice]

Pay the bank the minimum required (interest only) and store the rest in the offset.

Has the same nett effect but you keep the cash (principal) in your control.

Very, very big long term advantage to you instead of the bank.

 

[Kookie7]

I've currently got two loans interest only and will renew them as such after the initial 5 years. I don't have a choice, the cash flow is essential to control for me.