From: Anonymous

I currently have a block worth around 115k with a loan of 71k. this has had a growth of 12%+ in 3 years.

I have made a decision of buying a rental property and I am currently debating which format of loan to go with.

interest only and have minimal expense and maximum benefit from a tax point of view or go with an line of credit and build more equity in the property.

I guess my question is should I build equity quickly or don't worry about that and take the tax saving benefits from the IO loan.

also I was going to put money into managed investments, would this be advisable or use all the $$ for the property. should I diversify?

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Reply: 1
From: Dale Gatherum-Goss

Hi Keg

This is more of a personal opinion than a professional one, but, I hate managed funds. They make financial advisors (misnomer, or what!!) rich from the commissions and are not as good as direct investing in properties or shares.

It's better than doing nothing mind you, but, I still don't like them.

Have fun

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Reply: 2
From: Rolf Latham

Hi Keg

A Line of credit and an interest only loan at the end of the day are both interest only.

Generallly, but not always both types of loans can be paid off more quickly.

As to which is better in your situation its really hard to make a call with such limited information. Are you a high income earner ?


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Reply: 1.1
From: Anonymous

my history is I purchased a block to build a house three years ago. in that time I have paid off a fixed rate loan @ $500pm and have paid off about 3K off a PI loan. This property has increased at about 12.4% per year for the three years, and will likely be able to list on the market between 115-125K (the higher the better). That means the equity on this block is 30-40K+.

I have 600 shares in telstra and have been greatly disappointed (i hopped onto the t2 bandwagon and have got burnt, currently a 30.2% loss), I hope to sell the shares, pay off the loan and use the loss as an offset against the capital gain.
Although I would love to keep them and sell out at a profit. What's the better option?

My goal is to maximise my portfolio of properties while I can afford to do so ie before kids etc.

I am looking at properties around 160K in value in areas of higher rent (160-190pw).

I am unsure of the loan type to use, but the options as I understand it are;

IO loan and get good tax benefits and low outlays.

CL loan and mid tax benefits and medium level outlays.

P&I loan and get low tax benefits and high outlays. not early on this is similar to IO loan.

(note: I am think over the full term of the loan)

I see it as if I generate a large amount of equity in the first property (by injecting my own funds into it) I can vastly increase the time that it takes to buy the first and then subsequent properties. Jan somers suggests that you pay off your first home - so this in a way will be that first home for me, except I only paid 25 - 40% of the cost.

I am not really clued up on all this type of stuff (as you may be able to tell) so all the advice you can give is of benefit.

Thanks for taking the time

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Reply: 2.1
From: Splinter Wood

Hi Anon,

Maybe get a combination !!

Look at the possibilities to break the loan into 2 parts so for example get 50% Fixed over X years and 50% Line Of Credit (Equity Credit Loan).

That way you have a fixed amount for the X years and the LOC, you can pay off in lumps if you sell something or decide to increase your payments.

If you pay the LOC out you pay no interest ! You can then turn around and use the money for s'thing else.

I don't understand the differentiation in tax effectiveness on the different loans you mention ?? Interest is deductible...period. Capital repayment is not.

If you borrow 100K P&I and a 100K I/O, and you pay the same interest per dollar borrowed at any one time, you will get the deduction for the interest paid the same for each.

RE your shares etc ?? Your call.

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Reply: 2.1.1
From: Owen .

You said "If you borrow 100K P&I and a 100K I/O, and you pay the same interest per dollar borrowed at any one time, you will get the deduction for the interest paid the same for each."

The difference is that with the P&I loan you are also reducing the principle. That means that the next month the interest amount is reduced although your payment remains the same. The tax deduction you will get will also reduce and as the principle reduces a lot and your income exceeds your costs, you will pay tax on that.

With an I/O loan the interest is always the same because the principle is not reducing. As you are only paying for the interest (no principle) your payment is also lower improving your cash flow. Your tax deduction also remains the same. This relies totally on capital growth to ensure that you property will be worth more than your loan in the future.


"Gambling promises the poor what property performs for the rich – something for nothing"
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