P&I or IO loan

Hi all,

I was wondering what 99% of investors do; interest only or principle + interest. I take it that it's the first and a dumb question to ask.

My situation is that I plan to buy my first PPOR but it has a lease attached for a couple of months before I can move in. This means it won't be exempt from CGT if I plan to live in it for 12 months, rent it out for 6 years and move back or sell it. This is my biggest worry. Should I just look for something else that is vacant?

What if say I knew after 2 years I was most likely going to rent it out as an IP, does it matter too much that I am buying it with a lease and not being able to take possession on settlement? Is it normal to convert a P&I loan to PO loan?

Who else has been in this situation and what do you recommend?

Will.
 
Hi there

Best it set it up as IO with a linked offset - pump money into offset rather than the principle.

The rationale is that paying down the principle now, will reduce the size of the loan you can deduct when it becomes a rental (not ideal).

Put the money in an offset instead - you'll save some interest in the mean time and it provides flexibility for future plans.

cheers

Jamie
 
That's great feedback. I've never heard of an IO offset account. Ok, so for mu further understanding, you put money into this offset account which ideally reduces the interest you pay as it's seen as money towards the loan payment but not taken off the loan like principle.

What happens if I decide to never move out and live there for a very long time? I just convert to P&I, take the cash from the offset and pay down? It equals the same thing right in later on? No loss or gain either way.
 
Yep - spot on!

If you never rent it out you can either continue to pump money in the offset to a point that you've offset the entire loan or revert to P&I.

If your disciplined with money I'd go with the IO and offset option regardless of how long you live in the place. It just provides much more flexibility in the future.

Cheers

Jamie
 
Hi all,

I was wondering what 99% of investors do; interest only or principle + interest. I take it that it's the first and a dumb question to ask.

My situation is that I plan to buy my first PPOR but it has a lease attached for a couple of months before I can move in. This means it won't be exempt from CGT if I plan to live in it for 12 months, rent it out for 6 years and move back or sell it. This is my biggest worry. Should I just look for something else that is vacant?

What if say I knew after 2 years I was most likely going to rent it out as an IP, does it matter too much that I am buying it with a lease and not being able to take possession on settlement? Is it normal to convert a P&I loan to PO loan?

Who else has been in this situation and what do you recommend?

Will.

It will onlybe subject to CGT for the time it was rented out as a percentage of the total time it was owned. This means as time passes by the % subject to CGT will decrease - assuming you move in.
 
IO for me, on all IP's and PPOR.....keeps more month to month cash flow available for other opportunities, like the above examples....more flexibility
 
Great responses and I've certainly leart something new here.

One last grey area from me. There is all this talk about keeping the holding costs down and to not go for high strata complexes. Why is this a problem when the high strata costs will eventually be tax deductable? Is the point to not go for high strata is so you have more cash flow to play around with despite getting some of it back from tax return?

Thanks.
 
You don't have any control over strata and it will always continue to increase. Also if you have tenants/owner in the complex that do not maintain the property well - then the strata will only increase or you will be left with a building that is poorly maintained and come resale it will hurt.

Seriously I hate strata and I am personally selling off my last unit in my portfolio and flipping it to a raw development site. We are not running out of units in Sydney - we are running out of land!
 
I used to be an IO fundamentalist, but I am slowly changing.

My view is this -
IO on all investments while you have an undeductible debt.

Then

PI on 1 investment loan with the rest going into an offset account.
Once the 1st investment property is paid off then PI on the second.

It is always good to pay down debt.
 
Seriously I hate strata and I am personally selling off my last unit in my portfolio and flipping it to a raw development site. We are not running out of units in Sydney - we are running out of land!

Yeah I'm hearing you - one of the townhouses we own keeps jacking up the strata fees and I really can't see where the money is going. It's at the point where it's now just ridiculous and I might get rid off it.

Cheers

Jamie
 
PI on 1 investment loan with the rest going into an offset account.
Once the 1st investment property is paid off then PI on the second.

It is always good to pay down debt.

I don't get that. Having a loan that's fully offset is more flexible than a fully paid off loan. e.g. you lose your job, your borrowing power drops. You might not be able to get a loan even if you have an unencumbered property?
 
I don't get that. Having a loan that's fully offset is more flexible than a fully paid off loan. e.g. you lose your job, your borrowing power drops. You might not be able to get a loan even if you have an unencumbered property?

True.

But I have seen some people who just start spending the money and their progress slows. With one PI loan you are paying off debt, which is generally a good thing, so it is a form of forced savings.
 
But I have seen some people who just start spending the money and their progress slows. With one PI loan you are paying off debt, which is generally a good thing, so it is a form of forced savings.

Then it's about the discipline of the person, not the nature of the product.

We've had examples where an older person has a fully paid off house and basically can't access the equity.
 
Then it's about the discipline of the person, not the nature of the product.

We've had examples where an older person has a fully paid off house and basically can't access the equity.

Yes that is right.

I leave it up to the client, but just advise them on the potential issues.

My own personal view is that PI is good on investment properties once the non deductible debt has been paid off.
 
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