Principal And Interest Or Interest Only?

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?

I have noticed in the past few weeks it's getting a little tougher out there for investors; not talking policy, the lenders are scrutinising deals harder as well. This is bound to have a flow on effect to all mortgages.

The answer is probably that it's a little harder, but hard to quantify. Lenders don't really tell us how much they like the deal, only if it's approved or not.
 
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.

Thanks Jess Peletier

I understand where your coming from. I will change my loan to an I/O with an offset account.
 
So, just wondering ...

Our PPOR is on a P&I loan. Property is worth about $850K, remaining loan amount $390K, fully offset. We have another $60K in savings elsewhere. If we wanted to buy an IP (or two), what would be the best way to go in terms of loans? We have no intention of turning the PPOR into an IP any time soon.
 
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So, just wondering ...

Our PPOR is on a P&I loan. Property is worth about $850K, remaining loan amount $390K, fully offset. We have another $60K in savings elsewhere. If we wanted to buy an IP (or two), what would be the best way to go in terms of loans? We have no intention of turning the PPOR into an IP any time soon.

Borrow the deposit against the PPOR and 80% of the IP value against the IP.
 
We have P&I with offset for our PPOR. Sure IO would be better for cashflow for future IP purchases and better in taxation when it gets turned to IP, but both my better half and I think it is wise to have forced savings to our own home as it is easy to spend our offset money.
 
We have P&I with offset for our PPOR. Sure IO would be better for cashflow for future IP purchases and better in taxation when it gets turned to IP, but both my better half and I think it is wise to have forced savings to our own home as it is easy to spend our offset money.

Yes, that is a valid point and many people do tend to spend more if they have cash lying around in offset accounts.
 
Yes, that is a valid point and many people do tend to spend more if they have cash lying around in offset accounts.

It is, especially once you have kids and you need to spend a lot of money on nappies, childcare, school fees, etc etc etc. All adds up. Without strong discipline on finance it is very easy to spend it all.

Of course for people without kids, they can still spend it all anyway on different things (eg handbags, holidays, nice cars etc).
 
We have P&I with offset for our PPOR. Sure IO would be better for cashflow for future IP purchases and better in taxation when it gets turned to IP, but both my better half and I think it is wise to have forced savings to our own home as it is easy to spend our offset money.

If you plan on turning it into an IP then you could be costing yourself a heck of a lot of money down the track.

IO has a lot of other benefits as well but most importantly greater opportunity. The money is yours in an offset, you don't need to ask the bank for it. I always think to the GFC, how many Americans had 600,000 homes with no mortgage only to find there homes were now worth 100,000? Now what happens when they want to borrow against that? No chance! No equity and banks saying no.

Reverse that and go IO with offset then yes you have a higher debt but you are also cashed up. A cashed up sophisticated investor in the states could habe absolutely cleaned up and not needed to borrow a thing. Decent properties were selling for 15k. If you had 200,000k in the offset you could have bought 10!

Now I cannot see it happening to this extent in Australia but why not have the security just in case?
 
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.

whats the better tax outcome with this scenario, of using a offset account?
 
If you wanted to buy groceries one week the interest on the money used could be tax deductible if using an offset account.

you mean like u put your pay into the offset account earning u interest and you buy your normal stuff using a credit card which has no interest charged for a month+ and then pay credit card off at end of the month with the money in your offset account which over the month has made you some interest? :S
 
you mean like u put your pay into the offset account earning u interest and you buy your normal stuff using a credit card which has no interest charged for a month+ and then pay credit card off at end of the month with the money in your offset account which over the month has made you some interest? :S

I wasn't thinking of the credit card, but that could make it better.

This guy's property is an investment property, so the interest is deductible.

If he had a spare $100 he could put it in the offset and save interest on the $100 at the same rate as the loan - 4.5% or thereabouts.

When he goes and buys $100 of groceries the interest on the loan will increase, but this interest rates to the property purchase and so is deductible. This means indirectly he is claiming interest on the money used to buy groceries.
 
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