PI or Interest only loans



From: Anonymous

I have been doing a bit of reading on both priciple/interest loans and interest only loans. I can understand the advantages of having it as interest only but for someone who is looking to keep properties long term, what would be the best option.

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Reply: 1
From: Rolf Latham

Hi Anon

In my view there is no rule of thumb. It depends on.

Your age, income, future plans, the properties, other liabilities, your ability to get mortgage insurance etc etc.

Some would argue why should you pay for something woth todays dollars if you can oay with deflated dollars in 20 years time, but many times this theory can not hold.



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Reply: 1.1
From: Russell Chellew

Hi ,

I agree with Rolf, that it depends on individuals financial situation and future plans etc .

I believe I/O would the best option if you have an existing home loan debt to repay.I/o repayments will allow more of your funds to be directed to reduce H/L (non tax deduct able debt)or perhaps save for deposit on another Investment prop.

For example.

$200K Inv loan @ say 6% over 25 yrs = $1288 pm or $15456 pa in loan repayments .

against $200K @ 6% I/O repayments of $1000pm or $12000pa

The difference of $3456 could better directed toward H/L debt reduction or saving for another IP


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Reply: 1.1.1
From: M O N T O

I've been wondering the same thing for quite some time now. Although the difference of payment can be better used for other purpose, but you might be paying more interest over the long term of the loan.
I am wondering if someone did a spreadsheet to compare the figures, and work out which works best in what circumstances.
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From: Sim' Hampel

Yes, there is no "might" about it. While interest rates are higher than the inflation rate (which is almost always the case as far as I know)... then you will always pay more interest over the long term on an IO loan than you will on a P&I loan, even taking inflation into account.

Of course, this does not take into account the ability to hold more growth property on an IO loan than on P&I commitments... paying more interest over the long term may be insignificant compared to the extra capital gains you get from holding that extra property you can afford with the additional cashflow.

PS. the argument about paying for something in tomorrows dollars is a fallacy - it will cost you more if you wait.

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