P&I or Interest Only

[emmajane6]

Hi all,

I have a small portfolio which I am about to add to with an offer accepted today (subject to DD of course).
LVR is about 70% but we do have some neg geared properties which need topping up each week (this has reduced dramatically since last year).
The new place is producing a $45 per week profit based on 100% lend and interest only.
We are relatively young (mid 20's) and dont intend on retiring for at least 20 years.
I wonder if it would be wise of me to set this place up as P&I to reduce the principle owing or is it better to throw that extra cash into the neg geared properties. If we did P&I we would reduce that $45 down to about $3 a week so still not losing money each week. All the other properties are on IO but plan to change them to P&I as soon as they start paying for themselves.
Can anyone recommend pros and cons to each scenario?
I used to think that IO was the only way until everything went pear shaped.

Ta,
Emma

[spurner]

Go IO imho.

You can use the spare cash to service other properties, renovate property, buy more property, spend on anything you want, or simply save it so you can access it easily in the future and even pay it off the loan if you want to.

[Rosco]

If you have a personal property, then use the extra money to pay off this loan. As there is no tax deduction on a personal house, go P&I on this. Then leave the Investment properties IO.

Ross

[emmajane6]

Thanks for the advice guys.
thats what i thought initially but then also thought that if we have a whole heap of freehold property in 20 yrs time we are going to be paying a s*load of tax so maybe its better to use that + $$ to service bad debt.
Don't have a personal home but do have a personal loan which I will try to get rid of this year so this money will help.

Emma

[ecoeco]

I always go P & I. I started when I was 21 and the first property was paid off by the rent (except that the equity has been recycled of course). I started using P & I 'cos I didn't know there was another option. I'm willing to use P & I now because I know that I am a 'spendy'. I will always find something to spend surplus cash on and it is never a loan, at least with P & I I know the loans are reducing.

Also, for a relatively small amount now I know I will own the properties in 2030 or earlier, it doesn't really matter what the housing market does.

Good luck with your decision.

[Jabroni01]

If you have a personal property, then use the extra money to pay off this loan. As there is no tax deduction on a personal house, go P&I on this. Then leave the Investment properties IO.

Ross

I've recently paid off my personal loan. Should I now look to go P&I on the rental properties now then? With interest rates dropping, its looking like I won't have to top this up myself by much any more (well at most 5 years if we lock in a a good rate).

Or better just leaving IO still?

Jab's

[Keithw]

I think it depends on other uses you have for the cash.
First priority is always to pay off personal non deductable debt.

Then, if you have other cash requirements, or you know of likely upcoming purchases, a portion of your loan on revolving credit can be a good way of having capital available when you need it, but also allowing effective principle payoff by holding any extra income/ savings in the account, reducing the loan on a daily basis.

Whether you hold any excess in the property (by P&I) or you hold it somewhere else so you have easy access to it (such as a revolving credit) depends on your future buying intentions and how quickly you need to get hold of the money.

Ultimately your aim should be to have freehold properties in 20 years.
Don't worry about paying tax- it is always easy to sort that by buying another property, & paying tax means you are making money.

[Dunning]

IMHO P&I all the way. If/when the shit hits the fan I can always change over to IO. If your IO your in the poo quicker. In 20 years debt free(if not sooner). If it's IO then you still have to repay the principle at some point and inflation isn't going to reduce it too much.

Yes there are disadvantages, less initial cash flow which can limit the number of properties that you can purchase.

A tip to make a property neg geared is when refixing the mortgage have it over a term(say 15 years) that makes it neg geared

[Gatekeeper]

A tip to make a property neg geared is when refixing the mortgage have it over a term(say 15 years) that makes it neg geared

Can you explain that one?

[k1w1]

We are relatively young (mid 20's) and dont intend on retiring for at least 20 years

hahahahahahahahahahahahaha

If I had 1 cent for each time I heard an optimistic 20-something young pup say that, I'd have $42.53

[k1w1]

I guess he means a shorter term means more expensive monthly payments, but then again, the total interest you pay is less. Now I'm confused too.

[Keithw]

It might mean higher payments, but the extra is only in principle isn't it ?
& principle isn't tax deductable, so a shorter term doesn't change whether it is negatively geared year to year

In fact thinking about it, if you pay of more principle, then each month there will be less interest to pay, so a shorter term makes you less negatively geared not more. and you temporarily loose the use of the extra cash you have been paying in capital (unless you can take it out of a revolving credit).

[tpr2]

I think it depends on other uses you have for the cash.
First priority is always to pay off personal non deductable debt.

Then, if you have other cash requirements, or you know of likely upcoming purchases, a portion of your loan on revolving credit can be a good way of having capital available when you need it, but also allowing effective principle payoff by holding any extra income/ savings in the account, reducing the loan on a daily basis.

Whether you hold any excess in the property (by P&I) or you hold it somewhere else so you have easy access to it (such as a revolving credit) depends on your future buying intentions and how quickly you need to get hold of the money.

Ultimately your aim should be to have freehold properties in 20 years.
Don't worry about paying tax- it is always easy to sort that by buying another property, & paying tax means you are making money.

Damn Keith you have been doing your homework.
Everybody is different however emma has indicated she has personal debt which is non-deductible and there for she should focus on reducing this to nil before paying off tax deductible debt on investment properties.

At the end of the day her debt levels are the same which ever way you look at it so why pay off the good debt first?

hahahahahahahahahahahahaha

If I had 1 cent for each time I heard an optimistic 20-something young pup say that, I'd have $42.53

nice k1w1.... I think I would have about $47.98

Don't take that the wrong way though emma because you are out there doing it, you have purchased income producing assets which will increase in value over time and since your goal is to pay them off over the next 20 years you will achieve that goal of retiring. It's a piece of cake when you have time on your side.

It might mean higher payments, but the extra is only in principle isn't it ?
& principle isn't tax deductable, so a shorter term doesn't change whether it is negatively geared year to year

In fact thinking about it, if you pay of more principle, then each month there will be less interest to pay, so a shorter term makes you less negatively geared not more. and you temporarily loose the use of the extra cash you have been paying in capital (unless you can take it out of a revolving credit).

If you are paying P&I over 15 years you will be making payments well in excess of the rental income and so it will be cash flow negative however it will actually be turning into a positively geared property. This is not a good outcome if you have other non deductible debt or better places to put your money such as other asset classes.

[emmajane6]

hi guys - thanks for all these replys.
I am glad I have humoured you kiwi, i am an awfully naive young thing and will no doubt be a slave to the wage at 50+ but I'm hoping like hell I have the option.
I guess I should have used the words 'financially secure' which would be more precise.

[tpr2]

take no notice emmajane.... 20 years is plenty of time to become financially interdependent enough to retire.
you have income producing assets that will increase in value over time as will the income you get from them.
good work.