I’m seeking comment on how other investors have handled the issue of using interest only loans to advance their portfolios. They look good for cash flow at the time!
Most banks require interest only loans to revert to P&I after 10 years. This has the potential to bring on cash flow issues. My wife and I have purchased five investment properties over 15 years from 1993 till 2008 and have been rewarded well with good capital gains till 2008. We hold 50% equity over the portfolio and good or bad all mortgages are with one bank.
Three of the five properties are on P&I and form the smaller part of our bank debt. The two later purchases are on IO with debt of $700k. We have downward interest rate reviews coming up next month which is good in one respect but as we wish to lock in rates for two years my concern is our bank will insist we start principle instalments. These two properties are barely cash flow positive and the removal of the 4% depreciation in 2011 has not helped. You will appreciate $700k at say 5.25% over 15 years means principle payments of $600pw which we need to find from our own personal incomes which have reduced in recent times with the slow economy.
The trap with interest only loans is the loan term reduces hence when you do start paying principle its stepped up due to the reduced years remaining. It brings us to the point where if our bank is insistent we are better off selling a property, reducing debt, which to a degree is not in the bank’s interest as they are in the business of loaning money but as they say the banks are in control.
Most banks require interest only loans to revert to P&I after 10 years. This has the potential to bring on cash flow issues. My wife and I have purchased five investment properties over 15 years from 1993 till 2008 and have been rewarded well with good capital gains till 2008. We hold 50% equity over the portfolio and good or bad all mortgages are with one bank.
Three of the five properties are on P&I and form the smaller part of our bank debt. The two later purchases are on IO with debt of $700k. We have downward interest rate reviews coming up next month which is good in one respect but as we wish to lock in rates for two years my concern is our bank will insist we start principle instalments. These two properties are barely cash flow positive and the removal of the 4% depreciation in 2011 has not helped. You will appreciate $700k at say 5.25% over 15 years means principle payments of $600pw which we need to find from our own personal incomes which have reduced in recent times with the slow economy.
The trap with interest only loans is the loan term reduces hence when you do start paying principle its stepped up due to the reduced years remaining. It brings us to the point where if our bank is insistent we are better off selling a property, reducing debt, which to a degree is not in the bank’s interest as they are in the business of loaning money but as they say the banks are in control.
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