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Mortgages - Interest only or Principal & Interest?

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  • Mortgages - Interest only or Principal & Interest?

    Hi everyone, I would be grateful to know if we are doing the right thing by paying P & I on our rental property's mortgage at the moment. We had to refix our mortgage in April. We had been paying $552.00 a fortnight interest only. Because the rates were lower when we refixed, we worked out that we could still afford to pay $500 a fortnight but the bank only wanted $360.00, so we decided to leave the payment at $500 which means that $140 a fortnight is paying off the principal. Its nice to see the overall balance going down slowly, but apart from that, not sure what other benefits or disadvantages we are getting (short or long term).
    Obviously when we eventually sell the property (we plan not to for quite a while), we will owe the bank a lot less that we sell for and therefore have more money coming to us, apart from that????????
    All advice greatly appreciated. Thanks.

  • #2
    If you have your own personal mortgage then you are better off paying that down first. This is from a tax advantage perspective. Personal debt/interest is not tax deductible and rental debt/interest is. So if you have personal debt pay it off first then go to your rentals.
    That said paying down principal is a great thing. You end up paying much less interest overall and shorten the life of the loan. So rather than the tenant paying your mortgage they end up paying you much sooner.
    [email protected]

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    • #3
      It depends on your focus - some investors keep to I/O loans for their IPs and the extra $$ go into their Revolving Line of Credit for deposits on new IP purchases or as 'Monkeyboy' said put the extra $$ against their personal loans.

      Other investors have some or all their IPs on P&I loans - Graeme Fowler is a fan of P&I for his IPs.

      Cheers,

      Donna
      SEARCH PropertyTalk, About PropertyTalk

      BusinessBlogs - the best business articles are found here

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      • #4
        All depends what else you have to do with your money that you are using to pay principle. Either personal debt, further investments or lifestyle. If you have nothing pressing in this regard then paying off principle reduces debt, makes you less vulnerable and increases the cash that comes to you weekly after debts and interest are paid.
        Doug

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        • #5
          Charms do you intend to take any loans for a property that you want to live in in the next few years?
          Hamish Patel | ph: 09 625 4693 | mob: 021 625 693
          My Website
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          • #6
            http://tvnz.co.nz/content/1649842/vi...p_windows_skin

            Watch Bob jones video on this thoughts about interest only and P+I.

            Very interesting and this guys been in the investing game for decades with a good $700 million+ property portfoilio.

            http://tvnz.co.nz/content/1649842/vi...p_windows_skin

            Those who cant be bothered watching, He's a fan of interest only.

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            • #7
              What are your goals / objectives to pay principal? (or paying interest only)

              How would investing $140 per week instead of paying principal fit into your financial plan?

              Are ALL your financial risks insured?

              Have you done a Fact Find Need Analysis with an Adviser?

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              • #8
                Hi All,
                Thank you all for your thoughts etc. We are lucky to be in the position of being mortgage free on our own home. Also still have around $60,000 put aside for deposit on 2nd IP (when we find it!!).
                Our thoughts at the time of paying I & P was to get the debt down and really didn't know whether putting the $140 a fortnight into savings at these low rates would be worth doing???

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                • #9
                  If you have no other debts to pay apart from your tax deductable ones then go for it. Try and get rid of them as soon as you can.
                  Hamish Patel | ph: 09 625 4693 | mob: 021 625 693
                  My Website
                  Be informed - register for our free monthly newsletter

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                  • #10
                    Hi fpl,
                    Can you explain what you mean about insuring our financial risks? And also, no we haven't had a fact find need analysis....???

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                    • #11
                      Why not put your $60k cash into your rental property mortgage too?

                      Then set up a revolving credit incase you need the cash for a deposit.

                      This way if you don't end up buying another rental, you are saving interest at around 6% rather than investing in around 4%

                      Ross
                      Book a free chat here
                      Ross Barnett - Property Accountant

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                      • #12
                        Hi Rosco,
                        I would really have to have "revolving credit" explained in very simple layman terms to consider putting the $60,000 cash into the rental property mortgage. We are so new to all this that its scary and outside of our comfort zone.

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                        • #13
                          A revolving credit facility is like an overdraft.

                          Say you current loan is 120,000, and have $60,000 cash.

                          So you rearrange the loan so that it is a revolving credit for $120,000. You then put the $60,000 cash into the RC, and then you have only a $60,000 loan but still have another $60,000 availalbe to use up to the $120,000 loan. This way you are only paying interest on the $60k owing.

                          BUT, if you have a fixed loan there might be break fees to do this or bankcharges.

                          Ross
                          Last edited by Perry; 30-05-2009, 07:24 PM. Reason: fixed typo
                          Book a free chat here
                          Ross Barnett - Property Accountant

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                          • #14
                            For investors shifting onto new low fixed interest rates I would recommend converting to P&I repayments. Chances are the repayments are still going to be lower than your Interest-only payments that you were making.

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                            • #15
                              Originally posted by markw1 View Post
                              http://tvnz.co.nz/content/1649842/vi...p_windows_skin

                              Watch Bob jones video on this thoughts about interest only and P+I.

                              Very interesting and this guys been in the investing game for decades with a good $700 million+ property portfoilio.

                              http://tvnz.co.nz/content/1649842/vi...p_windows_skin

                              Those who cant be bothered watching, He's a fan of interest only.
                              Off topic but why can I never get TVNZ videos to work. I get the first 25 seconds and the it goes mute for 3 seconds then it freezes. ON the other hand, I watched a 90 minute DL last night on Google wave that streamed in real time from the the US. I just dont understand.

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