Principal And Interest Or Interest Only?

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1. Traditionalists. Once they were called the wogs. Often Greeks, Italian etc. They hate debt. They borrow and try to smash the loan fast and furious. Sure its not tax efficient and deductions dwindle. But for many they build equity fast. They like P&I so they can repay. They use variable rates for that reason. When they have paid off one they buy another. They love to buy when the market collapses.

Awesome post Paul - and pretty much demonstrates what I see as well.

Often you see the second generation of "traditionalists" moving towards being "modern buyers" - it's always interesting to see/hear how they explain to their parents that they have no intention of paying down their debt :eek:

Cheers

Jamie
 
Hi

I am new to SS and a new investor. I currently have a property in vic which will be rented out in September due to FHOG obligations in vic.

ATM my loan with CBA is principle and interest, I have read all the post in this forum and though of switching to I/O loan to build up a property portfolio.

My question is don't the banks only allow you to pay I/O for 5 years? What happens after that period?

My loan is Variable rate home loan @ 4.44% atm, would i need to move to investment loan to be able to have longer I/O period? or what else can i do....?

Thanks ahead
 
My question is don't the banks only allow you to pay I/O for 5 years? What happens after that period?

My loan is Variable rate home loan @ 4.44% atm, would i need to move to investment loan to be able to have longer I/O period? or what else can i do....?

You should switch your loan to I/O immediately, don't wait until it becomes an investment property. The reasons behind this have been well explained previously in this thread.

After 5 years, the CBA is generally fairly easy to roll over into another 5 years. Most investment loans don't last 5 years anyway, investors have a tendancy to top up, refinance, adjust, etc. It's not that difficult for a loan to be I/O for a very long time.
 
You should switch your loan to I/O immediately, don't wait until it becomes an investment property. The reasons behind this have been well explained previously in this thread.

After 5 years, the CBA is generally fairly easy to roll over into another 5 years. Most investment loans don't last 5 years anyway, investors have a tendancy to top up, refinance, adjust, etc. It's not that difficult for a loan to be I/O for a very long time.
Thanks Peter_Tersteeg

Another question is it advisable to set up the I/O loan with an offset or not? I don't have any intensions of buying my PPOR anytime soon.

I have an understanding that if I have an offset account linked to the I/O account it will effectively reduce the interest so wouldn't that be reducing my tax deductibility on the interest? Should I just have it as a I/O loan only?
 
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Don't make it about the Tax. Have an Offset as a Savings Account for future Deposits. You still have to pay the Interest regardless.

So help us all to understand SS. You pay $1 in "Deductable Interest" to get 30c back from the Taxman? Roughly.
 
Thanks Peter_Tersteeg

Another question is it advisable to set up the I/O loan with an offset or not? I don't have any intensions of buying my PPOR anytime soon.

I have an understanding that if I have an offset account linked to the I/O account it will effectively reduce the interest so wouldn't that be reducing my tax deductibility on the interest? Should I just have it as a I/O loan only?

If you have a spouse who earns zero income, it may be worth putting anything extra in a savings account in their name only. In nearly all other scenarios an offset against your IP loan is still the best option.
 
1. Traditionalists. Once they were called the wogs. Often Greeks, Italian etc. They hate debt. They borrow and try to smash the loan fast and furious. Sure its not tax efficient and deductions dwindle. But for many they build equity fast. They like P&I so they can repay. They use variable rates for that reason. When they have paid off one they buy another. They love to buy when the market collapses.

They grew up not knowing how to use Microsoft Excel.
 
If you have a spouse who earns zero income, it may be worth putting anything extra in a savings account in their name only. In nearly all other scenarios an offset against your IP loan is still the best option.

I just spoke to my broker and she told me that because this is my first investment that I should pay off most of the loan so I can build equity inorder to invest more.

Is this option a good one to start of an investment portfolio or should I still convert it to an I/O loan?

I have a property in craigieburn atm.
Loan is about $290000
3bd 2 toilets 1 garage

Thanks Tyron
 
A question I'm always asked is "should I be paying interest only or principal and interest on my loans" so I thought I'd share my thoughts. For a lot of SS gurus - this info is nothing new but hopefully some of the new members will gain some benefit from it.
.......

PLEASE NOTE - this information is of a general nature. Please always consult taxation professionals about the specific nature of your situation.

Cheers

Jamie

Hi Jamie,

A family member may be ready to start investing (at last after my annoyance for the last say 15 years!). I am ready to help but I was just asked that question too, so it will be easy for me to paste your response, so thank you for that!
 
Awesome post Paul - and pretty much demonstrates what I see as well.

Often you see the second generation of "traditionalists" moving towards being "modern buyers" - it's always interesting to see/hear how they explain to their parents that they have no intention of paying down their debt :eek:

Cheers

Jamie

Yes, my Italian and Croatian friends have done just that, buying and paying it off! Kept buying and paying it off, so I am interested when the kids take over how they will structure it too?
Perhaps I will need to discuss with them the concept, I know they will think I am crazy!!!
 
I just spoke to my broker and she told me that because this is my first investment that I should pay off most of the loan so I can build equity inorder to invest more.

Is this option a good one to start of an investment portfolio or should I still convert it to an I/O loan?

I have a property in craigieburn atm.
Loan is about $290000
3bd 2 toilets 1 garage

Thanks Tyron

My gosh. Broker FIAL.
 
I just spoke to my broker and she told me that because this is my first investment that I should pay off most of the loan so I can build equity inorder to invest more.

Is this option a good one to start of an investment portfolio or should I still convert it to an I/O loan?

I have a property in craigieburn atm.
Loan is about $290000
3bd 2 toilets 1 garage

Thanks Tyron

Sounds good in theory, but you will be financially worse off down the track. You can get the same savings in interest by using an offset account, but a much better tax outcome.
 
I just spoke to my broker and she told me that because this is my first investment that I should pay off most of the loan so I can build equity inorder to invest more.

Is this option a good one to start of an investment portfolio or should I still convert it to an I/O loan?

I have a property in craigieburn atm.
Loan is about $290000
3bd 2 toilets 1 garage

Thanks Tyron

OH DEAR! Do yourself a favor and get a new broker ASAP.
As Terry said, down the track this could cost you a substantial amount of money each year.

And personally to me the concept of building equity is not paying down a loan (yes in theory it is) but real equity comes in the form of sweat equity e.g. renovation, development.etc or capital growth.
 
My lender (BankWest) will charge an extra .1% on the interest rate to switch my PPOR mortgage to I/O (which equates to approx $400 a year).

Still worth it Jamie? (yes I'm a disciplined saver and yes I will be investing in under 5 years time)
 
I just spoke to my broker and she told me that because this is my first investment that I should pay off most of the loan so I can build equity inorder to invest more.

Is this option a good one to start of an investment portfolio or should I still convert it to an I/O loan?

I have a property in craigieburn atm.
Loan is about $290000
3bd 2 toilets 1 garage

Thanks Tyron

I would always convert to IO unless you're not good with having accessible cash.

Your broker might mean well, but paying off an IP causes a world of hurt which she clearly doesn't understand. For eg, what happens when you want to buy a PPOR? All your cash is in your now paid down IP.

You access the equity and have a big, non-deductible loan for your PPOR, and a small deductible IP loan.

You want it the other way around which is achieved by keeping as much cash as possible and never paying down IP loans.

Many (most) brokers have no idea about the tax implications of what they suggest.
 
My lender (BankWest) will charge an extra .1% on the interest rate to switch my PPOR mortgage to I/O (which equates to approx $400 a year).

Still worth it Jamie? (yes I'm a disciplined saver and yes I will be investing in under 5 years time)

If you're going to rent out that property in the future and purchase another owner occ - then yes, prob makes sense to pay that little extra now and preserve the larger principal balance which you can claim against later.

Cheers

Jamie
 
You should switch your loan to I/O immediately, don't wait until it becomes an investment property.

Given the changes in lending criteria that have been coming through lately (and more to come), how easy is it to apply for a IO loan for a new PPOR (ie. getting pre-approval for IO loan before going out to buy a PPOR)? Wouldn't the lender want you to do P&I repayment if you tell them that it'll be a PPOR?
 
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