Interest Only Loans Gotchya

[PC]

Something I'm sure most of you already know...

When interest only period expires your repayments jump significantly.

eg $200K 25yr term @6%:
I/O for 5 yrs - monthly payment: $1,000
After 5yrs P&I monthly payment: $1,432

Just had 4 loans do this.
Back to drinking cheap wine I guess!

[Ahar]

PC....did you ask to extend the interest only loan?

I've done this with my bank.....been interest only now for about 10yrs and got a 5yr extension.

Mind you, I have reduced the amount owed by about 40% over a 10yr period.....and the current LVR is rather low

[Dragon Master]

Would that be because instead having 30 years to pay back the principle because you've (for lack of a better word) wasted 5 years you now only have 25 years left to pay back the principle and hence need to pay back more per month to catch up?

[Keys]

Nope. It's because there is no time frame to pay back principle. It is a loan to infinity. There is a proportion of the loan which is principle, and some (most initially) which is interest. On an interest only loan you are not paying the principle. It comes back to bite you in the end.

Some here suggest that you purchase many properties on interest only and sell off some after a few years for a profit. Using the profit, they pay off the other properties.

A little risky in this environment I suggest.

[speights boy]

Up to 30 years maximum was pretty normal for a Table Loan I thought.

[DazRaz]

I try to have loans interest only for long enough for the rent rises to cover the extra when principle payments start.

[flyernzl]

I have all of my loans on interest only.
Never had any problems renewing them with the same deal, you just have to ask and they roll over to another interest only.
I have paid off some of the principal here and there with lump sums.

Amazing that so many people here have principles when they discuss repayment of principal.

[cube]

With lucky (or unlucky) timing I switched from interest only to P&I with a lower payment, because interest rates had fallen so much.

[Ahar]

On an interest only loan you are not paying the principle. It comes back to bite you in the end.

Some here suggest that you purchase many properties on interest only and sell off some after a few years for a profit. Using the profit, they pay off the other properties.

A little risky in this environment I suggest[/B].

I go interest only because I believe it to be LESS risky

Borrowing at interst only rates allows me to build up considerable cash reserves that I otherwise couldn't with a P&I mortgage

Then I make an annual payment on my fixed interest only loan of up to 5% of the outstanding balance.... this doesn't attract a penalty

The point here is that I pay back the loan at an amount that I decide on.....not what is dictated to by the rigours of a convential table mortgage

The "downside" is that it takes a lot of discipline to keep your grubby mits of the cash surpluses

But for me this normally isn't a problem

[PC]

3 loans with ASB.
Already done 5yrs I/O.
To extend I/O period they want to redocument.
For 2 loans the rents more than cover the $600 P&I payment increase.
3rd loan will need topping up from my beer money :-(.
4th with ANZ - P&I at new interest rate is $100 per month cheaper than it was I/O - great!

An unexpected large jump in repayments that hadn't been on my radar.
That extra $ would probably be better used buying another than paying Principle?

[essence]

When one buys a property, split the loans into 80% IO & 20% P&I (or whatever percentage suits).

Ask the bank what the total repayment figure would have been, if you borrowed @ 100% P&I. Work out the difference between 100% P&I and the scenario of splitting the mortgages. You will generally find that you're paying less.

With the "extra" money that you're not paying by splitting the loan, you can

a) Pay the difference between the two P&I loans into another Bank account for future maintenance
b) Up the repayments on the split P&I until both the IO & P&I repayments total is equivalent to the 100% P&I mortgage repayments. That way you are over-paying the mortgage, thus reducing the length of the loan.
c) Pocket the $'s for a holiday in xxxxxx (choose your destination!). Probably a great experience at the time, but won't get the mortgage paid down any quicker!