First Investment property-help sought

[P.Bateman]

Hi Guys,

Next month we will settle on our first IP in Hamilton. Using some of the recommendations here we have used QRM and they have already found us a tenant willing to move in a day after we settle so thanks for that!

I have a question around the loan and structure- we are borrowing $360k and have laddered the mortgage with the biggest sum $220k being on 5 years IO at 5.02%. At IO the property is cashflow neutral. We bought our PPOR early this year and have a loan of $380k on it. Our intention is to pay off the PPOR as fast as we can as well as have cashflow to do some renovations like a bathroom and additional bedroom hence the IO on the rental. I have fixed a portion of the IP loan as P&I for 2 years ($55k at 4.45%) and have a $70k revolving credit line. I intend to pay down principal when I can through the P&I loan and the revolving credit. Are we doing the right thing here? Just as an FYI our home loan is fixed for 3 years at 5.99% so trying to pay that off quickly...

Thanks
PB

[BigDreamer]

My honest opinion - I don't agree with any IO loans. Especially given that your PPOR is fixed for 3 years so what is the point? If the loan against your PPOR was (or at least part of it) floating then I could see the point but not in this case.

[Damap]

Looks sound P. Get the debt down on your PPOR first as there are no tax benefits with that debt.

[primal]

Always try to repay the biggest debt first.
3 years fixed at 5.99%. That's too much interest.

[Damap]

Not the biggest the debt that has the least benefits. Also check with your bank, almost all banks will let you pay off 5% annually on a fixed mortgage.

[Nick G]

What's the break fee on that 3 yrs 5.99 one vs what you'd save by breaking and going to a lower rate? I broke about 890K in debt a couple of OCR drops back and it cost me more than $10K but will save 3-5x more than that over the next few years.

I'd IO your IP completely and put all resources into your PPOR like you've indicated, keeping the revolving credit.

Are you going to make the improvements to the IP soon or wait a bit?

[primal]

Just wondering ,do bank calculate break fees on the loan or they have their own fixed breaking fee.

[Damap]

They all have their own formulas but in simple terms it should be roughly the difference in interest they are losing. IF you are fixed at 6% and current rates are 5% generally it costs you the 1% in break fees. It is not this simple but it gives you a ball park.

[P.Bateman]

Thanks Guys- I actually only have 80% of my PPOR fixed at 5.99%- the rest of floating and revolving credit so intend to pay down the PPOR though these and the 5% extra. The investment property is all good to go so does not require any work to be done but I'm putting aside money for emergencies like plumbing etc

[BigDreamer]

Thanks Guys- I actually only have 80% of my PPOR fixed at 5.99%- the rest of floating and revolving credit so intend to pay down the PPOR though these and the 5% extra. The investment property is all good to go so does not require any work to be done but I'm putting aside money for emergencies like plumbing etc

OK then that is good as I could see the point of using IO on your investments. I initially could not understand it as I thought you had all your loan against your PPOR as fixed.

You now just need discipline to make sure you pay off the non-fixed portion of your PPOR loan.