P/I vs. Interest only...



From: Gavin J

Being a complete newbie to IPs (I just "discovered" all this a few weeks ago, and I'm madly trying to research everything I can!) - what's the benefit of taking out an "Interest Only" loan?

I've come across this idea a couple of times in my readings now, and I haven't found an explanation (yet!). It seems strange that you wouldn't want to try and pay off the principal as well...
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Reply: 1
From: Jeremy Laws

Very simple.
For any given loan the difference in P&I vs I/O allows you to buy another property. At least. Also as time goes on money is worth less. Improve your cashflow; buy more.
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Reply: 1.1
From: Rae B


Look at it this way, "It's not how much property you own, it's how much property you control!" I read that somewhere. Not my own words, but I can't remember who said it.

IO loans free up valuable cash flow in which you can source further properties to increase your portfolio.

I believe it is a personal decision in regards to what you want your portfolio to do for you. If you do not feel comfortable with a number of IO loans and you have enough cashflow to support the payment of a P&I, then go for it. This way you will have one property paid out and the rental income directed towards paying out your next property. This will also help you later if you have huge vacancies or you suffer a loss of wages.

Anyway, that is just one of my opinions. It all depends on your own situation and how comfortable you feel with your portfolio loan structure.

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Reply: 1.1.1
From: William Blake

Now we know the differences and benefits ... can anyone tell me of any financial institutions that have an interest only loan??

If there are none this may be a pointless discussion

(I am wearing my sceptics hat tonight)
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Reply: 1.1.2
From: Ric1 .

Another reason to go IO only, of course, is that the interest component of any repayments is tax deductible, but paying off principal is not.

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From: Rolf Latham

Hi William

Practically all lenders offer interest only on IP loans, most will also provide Interest only loans on owner occupier.

Find yourself a good broker to help you through the maze.


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From: Gavin J

Wow! Thanks for the rapid responses!

So I'm guessing that I/O loans have slightly lower interest rates...?

(One quick check to the Commonwealth Bank's site later....)

"Investors who wish to purchase properties with low initial cash outlay commonly use interest only loans. The reason is simple. This type of loan minimises the amount you have to pay each month, allowing you to maintain your lifestyle while investing in property. And it is through rising house prices in the market, or renovations to the property, that make it possible to realise a profit from property appreciation. "

Although I'm yet to find an interest rate list that shows the difference between their P/O and I/O loans.

I'm learning more every day! Thanks everyone.
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From: Sim' Hampel

On 3/11/01 10:25:00 PM, Gavin J wrote:

>So I'm guessing that I/O loans
>have slightly lower interest

No, actually you will probably find them slightly higher than P&I rates.

That quote you quoted about people wanting to pay less cash-up-front etc. is referring to the fact that P&I (by definition) has a principle component to the payment in addition to the interest whereas IO (also by definition) only has the interest component. As a result, your repayments on a weekly basis will be less if you choose IO, but you will not be paying back any principle.

>Although I'm yet to find an
>interest rate list that shows
>the difference between their
>P/O and I/O loans.

I just looked at http://www.national.com.au/Personal_Finance/0,,801,00.html

If you look at the third table down, it lists the rates for their National Tailored Home Loan Package, their Fixed Rate Home Loan and their Personal/Residential Investment Fixed Rate Interest Only Loan.

Now if we compare the last two (ignore the Tailored Home Loan Package as this is a honeymoon rate), you will notice that the interest only loans are 0.1% more for payments in arrears (the normal way of doing things). Ignore the "in advance" column, as you cannot compare these rates to the P&I rates... there is no equivalent.

Hope this helps.

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From: Russell H

The NAB have just told me that even if I take out a I/O loan, after the fixed interest period, it MUST roll over to P&I. Is this normal? Any other options?

( i guess that in 5 years, the P component will be proportionately less because of inflation, but I would still have to pay it...)

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From: Ric1 .

I have just re-negotiated my ANZ loan. In the letter telling me that it was time to re-negotiate, they quoted me the new repayment schedule, under a P&I regime. I told them that I wanted to continue IO. No problem, they seemed happy to allow that to happen.

Shop around if NAB won't budge - you've got nothing to lose.

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From: James Doherty

Don't know why they said that, the whole purpose of an I/O loan was set against the fact that the ten net pays your bill for you, only interest is claimable as a tax deduction, therefore an I/O for tax purposes is easy to manage. It really depends on what you want, but if it were me i would ask to speak to someone else at the bank or change banks. At the moment RAMS and CITIBANK are lending 95% LVR for investment loans at an option of 5 years I/I/O with application for renewal.
Speak to as many financiers as possible even at the same bank, it's incredible how many bankers don't even know their own products
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