Paying off the mortgage

Hi all

I'm still new to this game and I would greatly appreciate any advice you great people can offer me :) I'm about 4 weeks away from settlement but I'm still a little confused as to how best to pay off this purchase.

To summarise (figures are rough);
I have put down $150k as a deposit on a $350k apartment. I have the income to pay it off entirely in 5 years provided that I rent it out and I live with my parents for a few extra years (I'm still relatively young).

Is it wise to pay off an apartment so quickly? I ask because I rarely see it done. I only ever see people going for IO loans and such which makes me curious. I know it frees up cash for investments, but what other things am I missing? Paying off an apartment ASAP would mean less interest though.

My thinking is, I could own this place in 5 years time and buy another place and pay that off in another 5 years or so. Is there something inherently wrong with this plan that I'm clearly missing?? :O

Long story short, I'm very confused as how much I should be paying the bank back! Please provide some insight :)

Thanks!
 
I would set up an offset account and park your extra cash there. It gives you greater flexibility and you are effecitively still reducing your interest bill.
 
Why would you want to pay off an investment property? It doesnt make it worth any more and you will still achieve the same level of CG.

For example (taking into account that you are purchasing a good quality well located property) your property you bought for $350k will be worth $700k in 7-10 years time irrespective of whether you still owe $200k on it or not.

You are better off putting the dollars you would have used to paying it off to cover the costs on another $350k IP.

So in 7-10 years time your asset base will be $1.4m and will have achieved $700k in CG instead of $350k as would be the case holding only one property.


Hope this helps.
 
I agree - if possible, pull back on the deposit and keep as much as possible in a 100% offset account as well.

Try and find some good books or search this site for the benefits of gearing as this is why people usually do IO loans. Simply, instead of buying a $350k unit and using a 150k loan, you could use 10% deposits and buy 4 x 350k properties.

The benefit of this is then rent them each out, pay IO, and if you have chosen well, you will have 4 x 350k properties growing in value each year. For ease of numbers, assume the each go up at 10%, then 4 x 350k x 10% pa x 5 years means you have a lot more value than 350k x 10% pa x 5.

Doing the maths, if you buy 1 property and pay it off in 5 years and it has gone up in value by 10%, then you have an asset worth circa $554k.

If you buy 4, pay IO with all the extra payments you were going to put into the one, your assets would be worth circa 2.2million. Less the original amount borrowed (350 x 4 less 150k deposit) and you have just over $1million in value.

Hence, paying one off and being debt free - therefore putting more cashflow in your pocket each week is very attractive, however using leverage to acquire more, "should" put more in your pocket overtime. (assuming the properties you pick are in value declining locations).

Good luck on whichever path you chose to continue investing.
 
Basically as the others have said...

Instead of achieving the capital gains on one property over 5 years, you can achieve capital gains on 2-3 properties - also while you owe money on an investment property, the interest paid (and other expenses) is deductible against the rental income, but once it is paid off, there are no deductions and you must then start paying tax on the rental income!

Debt for an investment property is good debt :) But you have to be comfortable with the level of debt you have!
 
I agree - if possible, pull back on the deposit and keep as much as possible in a 100% offset account as well.

Try and find some good books or search this site for the benefits of gearing as this is why people usually do IO loans. Simply, instead of buying a $350k unit and using a 150k loan, you could use 10% deposits and buy 4 x 350k properties.

The benefit of this is then rent them each out, pay IO, and if you have chosen well, you will have 4 x 350k properties growing in value each year. For ease of numbers, assume the each go up at 10%, then 4 x 350k x 10% pa x 5 years means you have a lot more value than 350k x 10% pa x 5.

Doing the maths, if you buy 1 property and pay it off in 5 years and it has gone up in value by 10%, then you have an asset worth circa $554k.

If you buy 4, pay IO with all the extra payments you were going to put into the one, your assets would be worth circa 2.2million. Less the original amount borrowed (350 x 4 less 150k deposit) and you have just over $1million in value.

sounds like a good plan to me
 
Wow, thanks for all the quick replies. Much appreciated!

I'm actually going in to sign my mortgage documents in a couple of days. I'm guessing it would be too late to reconsider my current (somewhat lacking) 'strategy'. Giving that I'm 4 weeks from settlement, and am currently going for the barest home loan available, what would be the best option to back out of the loan and go with another? Is it generally hard/expensive to switch loans after the mortgage has started? I'll talk to my bank manager about it but I would like some advise beforehand if possible.

Cheers
 
its all lovely to say dont pay it off and save money on tax but further... you only pay so much tax to begin with and there will be a point where the neg gear will nullify and you go to positive gear. I think i could be comfortable in saying that most investors I know look for positive gear or CF+ properties.

My case, I'd say about 30% of the investment debt is P&I and 70% is I/O.
 
Also dont forget property investors best friend "inflation"

For example if I had of bought my property back in 1990 for $40 K. (2010 value $200 K) I would leave my loan IO rather than paying it off quickly by 1995.

I then pay it off in full in the year 2020, thirty years later when I plan to retire and want to sell off a couple of ips. In the year 2020 the property is now worth around $400 K, and the loan is a piddly little $40 K still.

The great thing is propertys go up in value yet the loan deflates in value over time with inflation. Imagine how fast you could pay off that $40 K loan in the year 2020 with future dollars rather than your dollars of 1990.
 
If it was a PPOR,I would pay it off quickly,
However as the others said,make sure you have a 100% offset account attached to this home loan and put all your money in there.

You will find that as time goes by and you have a larger amount of money in offset,your interest that you will be paying will get less and less,giving you the incentive to save even more.:p
 
Also dont forget property investors best friend "inflation"

For example if I had of bought my property back in 1990 for $40 K. (2010 value $200 K) I would leave my loan IO rather than paying it off quickly by 1995.

I then pay it off in full in the year 2020, thirty years later when I plan to retire and want to sell off a couple of ips. In the year 2020 the property is now worth around $400 K, and the loan is a piddly little $40 K still.

The great thing is propertys go up in value yet the loan deflates in value over time with inflation. Imagine how fast you could pay off that $40 K loan in the year 2020 with future dollars rather than your dollars of 1990.

So the bank allows you to leave that loan sitting there without ever servicing it for 30 years, therefore paying no interest?

Please, calculate how much interest you would pay over that 30 years before saying how wonderful it is to only have a 40k debt.

I'm with pa1nter:
If it was a PPOR,I would pay it off quickly.

Who knows where you will be in 20, 30 years time but if you have your PPOR fully paid at least it is one less debt to worry about.
 
Thanks for the replies everyone :)

I ended up going with an all-in-one package loan (credit card, loan, offset etc) so that I have access to an offset account. I pulled my deposit back to 20% and am now going to put the rest into the offset account for future apartment purchases. I intend on living in there for 6 months to satisfy the FHOG conditions but I am planning on moving back home after that period (unless I really enjoy living by myself, at which case it will become my PPOR). If it does get to that stage (where it becomes my PPOR) I'll probably switch the loan from IO to PI and pay off as much as I reasonably can with my salary pay but still look to purchase another apartment under IO, drawing funds from my offset account balance to pay off the deposit. I'm still trying to make sense of everything here and I'll try to read more about the topic as I go, but this is my first stab at making a plan.

Does anyone see any major flaws with this plan I dreamt up?
 
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