When is the best time to use Interest only variable loan ?

[JohnHenry]

Hi People,

Suppose I have moved out from the PPOR and then convert the unit into rental property or IP, is it the best time to change my loan into Interest Only for 5 years and then renew it again every 5 years ?

and convert back to Principal + Interest suppose I'd like to move in back to the property.

Can anyone share some thoughts and comment on this strategy please ?

Thanks in advance.

 

[james_w]

Hi People,

Suppose I have moved out from the PPOR and then convert the unit into rental property or IP, is it the best time to change my loan into Interest Only for 5 years and then renew it again every 5 years ?

and convert back to Principal + Interest suppose I'd like to move in back to the property.

Can anyone share some thoughts and comment on this strategy please ?

Thanks in advance.

If your turning it into an IP I would switch to Interest only are you also using this strategy move back in 5 years to restart the 6 year rule?

 

[Bigtone]

Hi People,

Suppose I have moved out from the PPOR and then convert the unit into rental property or IP, is it the best time to change my loan into Interest Only for 5 years and then renew it again every 5 years ?

and convert back to Principal + Interest suppose I'd like to move in back to the property.

Can anyone share some thoughts and comment on this strategy please ?

Thanks in advance.

i can't understand why anybody would ever have a principal and interest loan, why let the bank control what you pay them

 

[Peter_Tersteeg]

Strictly speaking, from a tax perspective, for anyone who's investing in property it's always better to have all of your loans interest only all the time.

There are a few practical issues with this and it may not be the right thing for your lifestyle, but if you're disciplined with money, the above advice would be correct.

Personally though, I do like the idea of owning my PPOR outright, so I pay P&I. I do expect to live here until I retire.

 

[Rolf Latham]

Always

Pretty much, unless you are bad with money, and some other rarer exceptions where the loan may be a risk.


Seek specific advice for the specific situation. There are many credit reasons why a lender may not offer IO. Just because a particular lender may not offer IO, doesnt mean that PI is a more suitable fit.

ta
rolf

 

[BayView]

Hi People,

Suppose I have moved out from the PPOR and then convert the unit into rental property or IP, is it the best time to change my loan into Interest Only for 5 years and then renew it again every 5 years ?

and convert back to Principal + Interest suppose I'd like to move in back to the property.

Can anyone share some thoughts and comment on this strategy please ?

Thanks in advance.

IO is good for cashflow - if you have a problem with that aspect of your investing.

Personally, I think it is always a good policy to be reducing debt as you go along; no matter how good your current position might be. It doesn't have to be loads.

So, IMO leave your loan as it is, keep paying down some principle as well.

The fees with switching to and fro will probably nullify any benefit from paying IO over that term.

Maybe talk to a broker (here on SS are a few) about changing to an OI with offset if you don't already have one.

 

[JohnHenry]

Always

Pretty much, unless you are bad with money, and some other rarer exceptions where the loan may be a risk.


Seek specific advice for the specific situation. There are many credit reasons why a lender may not offer IO. Just because a particular lender may not offer IO, doesnt mean that PI is a more suitable fit.

ta
rolf

If your turning it into an IP I would switch to Interest only are you also using this strategy move back in 5 years to restart the 6 year rule?

Hi James, thanks for the reply the reason why my lender suggest P+I was that because I was living in the Property, as at the moment I have paid that off approximately 40% of it over the past 3 years of the loan.

Last year I moved out from the property and then rent that out, I wasn't aware the benefits of IO loan, until yesterday the bank told me to switch on to IO for 5 years.

So I guess in this matter I can apply for the IO loan even though I can pay more than what the bank ask me to pay monthly.

 

[JohnHenry]

Strictly speaking, from a tax perspective, for anyone who's investing in property it's always better to have all of your loans interest only all the time.

There are a few practical issues with this and it may not be the right thing for your lifestyle, but if you're disciplined with money, the above advice would be correct.

Personally though, I do like the idea of owning my PPOR outright, so I pay P&I. I do expect to live here until I retire.

Hi PT,

I'd say yes at the moment I'm disciplining myself to always pay more than what the bank ask (I guess this is my habits since I got this P+I loan).

As soon as the loan is almost fully repaid eg. 99% then I can move into this property again.

 

[JohnHenry]

i can't understand why anybody would ever have a principal and interest loan, why let the bank control what you pay them

Bigtone,

The reason was I do not know until yesterday I got the call from my bank. I thought that the bank representative was good enough to know which solution is better for my situation, well I guess it's not that bad since I now got the habit of paying the debt down and putting all of my available find into the offset account

So I assume that with interest only loan, the bank ask lower monthly payment as oppose with the P+I

 

[Rolf Latham]

The reason was I do not know until yesterday I got the call from my bank. I thought that the bank representative was good enough to know which solution is better for my situation,

Note

Its not the bankers job to set up a loan structure for you.

Only to not place you into a "not unsuitable" product.

Unless you have spec stated that you will turn the place into an IP, AND made the banker aware of the potential tax consequences, then they have done thr right thing.

Its not really their job to ask to many deep questions either.

Very much a HUGE can of worms being opened here.

ta
rolf

 

[Rolf Latham]

Hi James, thanks for the reply the reason why my lender suggest P+I was that because I was living in the Property, as at the moment I have paid that off approximately 40% of it over the past 3 years of the loan.

Potentially a nice little bonus for the ATO, depending on what happens with your future.


ta
rolf

 

[JohnHenry]

Potentially a nice little bonus for the ATO, depending on what happens with your future.


ta
rolf

why is that so ?

does P+I loan is not tax deductible ?

 

[JohnHenry]

Note

Its not the bankers job to set up a loan structure for you.

Only to not place you into a "not unsuitable" product.

Unless you have spec stated that you will turn the place into an IP, AND made the banker aware of the potential tax consequences, then they have done thr right thing.

Its not really their job to ask to many deep questions either.

Very much a HUGE can of worms being opened here.

ta
rolf

Rolf,
Does this means that I should've told the Bank to switch my loan from P + I into IO by the time I moved out of the PPOR ?

 

[Rolf Latham]

Rolf,
Does this means that I should've told the Bank to switch my loan from P + I into IO by the time I moved out of the PPOR ?

Nah, Im saying the advice you have received is "adequate" for legislative purposes...............but its woefully lacking

ta
rolf

 

[jrc77]

Rolf,
Does this means that I should've told the Bank to switch my loan from P + I into IO by the time I moved out of the PPOR ?

Your loan should have been IO with offset from the start. Putting any extra money into the offset account (hopefully at least the difference between the P+I and IO repayments). Then if you move out and make it a IP, you can use the funds in the offset for a private purpose (say buying a new PPOR) and the interest on the full loan amount is tax deductable.

Regards,

Jason

 

[JohnHenry]

Your loan should have been IO with offset from the start. Putting any extra money into the offset account (hopefully at least the difference between the P+I and IO repayments). Then if you move out and make it a IP, you can use the funds in the offset for a private purpose (say buying a new PPOR) and the interest on the full loan amount is tax deductable.

Regards,

Jason

Jason,
Thank you for the explanation, yes that is what I'm doing now at the moment.

Any rental income and salary goes to the Offset account which is linked to the home loan account (P+I)

for the tax deduction benefits, I can claim the interest on the home loan account since it is a separate facility.

the only problem with this approach is that the interest on the loan is decreased but the principal is increasing.