Pros and Cons of P&I Loan & IO Loan for PPOR

[rodimus]

Hi

I am planning to buy my own PPOR and get the FHOG.

Would like to know, does the benefit of using P&I loan outweight IO loans for PPOR?

For P&I Loan:
-pays off principal too, but doesn't do much in the first many years.
- reduce your cashflow to buy new properties in the short run.

FOR IO Loan:
-increase cashflow, but interest not deductible for PPOR.

I wonder which one outweighs the other?

 

[Bushy]

I/O increases your cashflow which will increase your servicability for future loans.
If you set up a 100% offset and drop any of your extra cash in it, it will have the same effect as P/I loan and you will save non deductable interest.

When you move out to bigger and better PPOR as most do in an average of 7yrs, you will be able to use offset for the deposit of the new home and the old home will have high debt and will make for a better IP.

Ideas only , not advice

Regards Bushy

 

[Simon]

If this is the only home you will own until you die then P&I is the obvious choice.

If you want ultimate flexibility with the same advantages then I would choose IO with offset every day.

 

[Perp]

The interest isn't deductible for either kind of loan. I'd definitely go for I/O with an offset. Put the amount you would have repaid in principal into the offset if you want the discipline of enforced savings.

 

[yo yo ma]

I/O increases your cashflow which will increase your servicability for future loans.
If you set up a 100% offset and drop any of your extra cash in it, it will have the same effect as P/I loan and you will save non deductible interest.

Ideas only , not advice

Very good ideas... I would suggest the same

 

[dean lynch]

Think about what else you would do with the difference between paying P&I and paying IO.

If you are thinking about investing that money then the return should be a higher percentage than the cost of your mortgage, that way you are making the most of the money.

If you want to own your own home, at some point, then you should pay P&I. The beauty is that the equity you create is able to be taken to your next PPOR and eventually you will own your own home outright. The equity can also be used to pay deposit and fees on an investment property.

Is your objective to eventually own your PPOR outright or is that unimportant? If it is to own it then you should start with P&I.

Cheers,
Dean Lynch
www.deanlynch.com.au

 

[Psyk]

Certainly depends on what your ultimate aim is.

Our aim is to own our PPOR outright so we pay as much as we can into it both P&I obviously.

We're nearly there so that major milestone in our strategy is a big plus and something we'll look forward too.

 

[rodimus]

Thanks for the replies everyone.

My aim is to buy a PPOR, and then continue to buy more IP. I already have 2 IP, and thinking of using my FHOG for my first PPOR.

I guess that means I should use IO with offset...

 

[Spectre]

I've gotta disagree with the P&I thought on the surface & think I/O and offset.

Due to little reasons such as

You're not locking the P&I payment into an amoritising credit limit &

You have access to the funds more easily (ie. dont have to do another loan to get it) &

you're setting up the property for the 5% chance you might end up having to rent it out if you cant sell it

 

[dwv]

Can I ask which lenders offer IO with offset? Do the major banks offer this?

 

[Spectre]

dwv

pretty much most do

bar maybe ing

and cba's offset isnt that chop IMO unless you enjoy juggling money every month. Depends on what you want it for though.

 

[alexlee]

Certainly depends on what your ultimate aim is.

Our aim is to own our PPOR outright so we pay as much as we can into it both P&I obviously.

We're nearly there so that major milestone in our strategy is a big plus and something we'll look forward too.

psyk, can you honestly say you'll be living in your current PPOR forever? Most people don't stay in the same house forever, especially if they're still relatively young.
Alex

 

[dwv]

dwv

pretty much most do

bar maybe ing

and cba's offset isnt that chop IMO unless you enjoy juggling money every month. Depends on what you want it for though.

Wait.. sorry, I was thinking of fixed rate with offset... that was what I was looking for last year. Most of the major banks don't offer this, do they?

 

[crc_error]

Wait.. sorry, I was thinking of fixed rate with offset... that was what I was looking for last year. Most of the major banks don't offer this, do they?

CBA offer this, but only offset 3%.. which is a waste of time.

Best bet is lock say 3/4 of your loan and leave 1/4 variable and connect the offset to it. This is what I have done recently.

CBA also has 10 year interest only loans which can save you on re-drawing up loan documents after 5 years which usually comes at a cost to you.

 

[Spectre]

actually you can get a 1 year fixed w/100% offset in the low 8s.

Problem is after a year what do you do as their normal fixeds dont have it after that. either its fix the lot or roll it to a variable w/offset.

Usually your main culprit with 100% fixeds on longer than a year is adelaide bank.

Bearing in mind people say they dont care about rates then knock ad bank back because they're a bit higher. But dont think many would be sayiing that who took ad bank 2 yrs ago. But in my thinking, for product itself its one of the best fixed rate products you could find due to that offset. Bear in mind its all personal names with them direct.

 

[Gremlin]

Thanks for the replies everyone.

My aim is to buy a PPOR, and then continue to buy more IP. I already have 2 IP, and thinking of using my FHOG for my first PPOR.

I guess that means I should use IO with offset...

Rodimus,

I'm not sure I understood your shorthand, but if you already have 2 IPs you won't be eligible for the FHOG.

Gremlin

 

[crc_error]

Rodimus,

I'm not sure I understood your shorthand, but if you already have 2 IPs you won't be eligible for the FHOG.

Gremlin

He will be providing he didn't purchase them as PPOR, but as investment properties.. ie he paid the investment stamp duty, and the loan is a investment loan.

 

[alexlee]

Rodimus,

I'm not sure I understood your shorthand, but if you already have 2 IPs you won't be eligible for the FHOG.

Gremlin

If you bought IPs after June 2000 and didn't live in them, and didn't claim FHOG for those IPs, you're still eligible.
Alex

 

[Gremlin]

Fair enough. I never really bothered to fully understand the nitty gritty of it myself as I've had my PPOR since many of you were in nappies.

 

[Simon]

The beauty is that the equity you create is able to be taken to your next PPOR and eventually you will own your own home outright. The equity can also be used to pay deposit and fees on an investment property.

Is your objective to eventually own your PPOR outright or is that unimportant? If it is to own it then you should start with P&I.

Cheers,
Dean Lynch
www.deanlynch.com.au

Only if you sell the PPOR.

If you are buying a cheap starter home that will be an IP in a few years time then IO with offset gives you the flexibility to transfer the payments you have made on the principle.

I challenge you to find me a scenario with P&I is distinctly better than IO with offset.

The only one I can think of is the undisciplined saver who will spend the offset - and we aren't reaching them on this forum!