Best Interest Only Loans?

[leapy]

Hello there,

I'm investigating interest only loans with regard to the most recent purchase. I have not used one before and I wondered whether anyone had any satisfying or dissatisfying experiences with IO products in the NZ market.

Thanking you in advance.

[tim360]

Have an interest only loan with the BNZ, no problems with getting it, rates based on standard P&I rates, fixed for 2 years.

[Annett]

Hi Leapy

They are readily avaliable, eg BNZ and National Bank, usually up to the first 5 years of the loan then move to P&I say on a 30 year loan.

You may however benefit from reading an extensive forum on Interest only vs Principal and Interest mortgage repayments. If you do a search you should be able to find it.

if I find it I'll see if I can post it to you. All the best with your inquiries.

regards
Annett

[Annett]

This is the thread I was meaning

http://www.propertytalk.co.nz/postx747-0-0.html

Annett

[leapy]

Firstly, thank you for taking the time to reply. I understand how IO loans work and the pros and cons of them. It is just that to this point I have chosen to deal exclusively in P & I loans. But, for the first time for me, I think an IO loan would be better suited to this particular property and circumstance.

It is great these links have been posted and will have the opportunity to educate - I'm all for that.

I would also be most grateful for any tips or advice that forumites are able to post, re IO loan products in New Zealand.

Cheers!

[orion]

But, for the first time for me, I think an IO loan would be better suited to this particular property and circumstance.

Hi Leapy - why??

Regards
Graeme Fowler

[leapy]

It is a good opportunity that has been signed at a price that is pleasingly under the market. (I have done my research in the area including access to all possible sales data, and I know the area well). It is, however, a bit of a stretch for me. The finance is likely to be rejigged on my portfolio later in the year and I want this property to have minimum holding costs in the meantime. I would anticipate going to a P&I loan on it at this time.

Feel free to pitch any flaws you see in this logic.

[RentMaster]

Hi Leapy.

By the sounds of it, I/O loans are appropriate for you. What is appropriate for one person might not be appropriate for someone else. It sounds like the P & I loan is going to be a bit of a stretch of the budget. So you either go I/O or not at all.

If the P&I loan is a stretch, then just make sure you are not over-extending yourself, even with I/O. If the market turns pear shaped than make sure you can survive it.

P&I I believe is better long term if you can afford it, so switching later is a good idea.

[tuhoe]

Orion

Can you please tell me if purchasing buy and holds, I assume that to improve cashflow its best to have a interest only loan and not pay them off forever... am I correct or would this suit me and another investor?

Tuhoe

[orion]

Can you please tell me if purchasing buy and holds, I assume that to improve cashflow its best to have an interest only loan and not pay them off forever... am I correct or would this suit me and another investor?

Hi Tuhoe,

Cashflow is a word that has been very popular to use since Robert Kiyosaki wrote the book Rich Dad Poor Dad, and most people now use it in such a way as to think it makes them more of an intelligent investor, and that they know what they're talking about.

When it comes to property investment these days, to get properties that are positively geared even after putting in a 20% deposit is often very difficult, unless you're buying in dying towns or where no one wants to rent. So let's say you do buy an investment property with a 20% deposit in a reasonable location and then use interest only, once you take out all your other expenses, you may if you're lucky have a minimal cashflow of a few hundred to a couple of thousand dollars a year at best.

My question is - how many properties would you have to buy in such a manner in order to replace your current income? If you're earning $60,000 a year now, you might need 40 or 50 properties bought in such a manner to achieve this. This to me is just plain stupidity and highly speculative. Especially now that the prices have gone up in most areas so dramatically in the last 3 or 4 years.

Warren Buffet says many people invest and use debt like this - "they're driving along a bumpy road with a knife taped to the steering wheel hoping they won't get stabbed in the stomach - eventually they will get stabbed."

Unfortunately this is what most investors do that use interest only and rely on forever increasing property prices. I get bored with saying the same things over and over again, some people listen and understand, but the majority just do their own thing.

To me, going interest only now is more dangerous than ever before. Sure, you'll hear lots of success stories of people that have started out with nothing and achieved big results in the last 3 or 4 years, and the thing is anyone could have done the same thing over this time - no matter what strategy and rules they followed.

It's very easy to make money in a rising market, but people think that there's something special about these type of people. It might be tempting for others to follow in their footsteps as if there's something special or magical about them, but I can assure you it's only temporary success for many of them.

Any idiot can make money in a rising market and that's the problem - that's when most idiots get in. Just wait until the market changes and see what happens. If you're going to follow someone else's strategy or rules, make sure they've been through and survived the down markets, as well as the up markets where anyone can do well.


I've used this quote before from Keith Cunningham "You never know whose swimming naked until the tide goes out."

Regards
Graeme Fowler

[MarkS]

I love that quote from KC, Graeme!

[kelster]

Hi everyone
By the way, Graeme Fowler, your property investor profile book is one of the best and most concise books I have read on PI in NZ. Well done!
Orion makes some really important points. When we bought our first two propeerties, we looked at IO loans and could see they'd be appilcable in certain cases.
In dealing with our bank manager, (also a PI, helps a huge amount), the following points were made:
1. IO loans longterm result in you never removing the loan.
2. In order to clear any debt, some properties have to be sold (incurring depreciation clawback and sales fees, if sold professionally).
3. IO loans are often only allowed for 1-2 years next onto P and I, often resulting in cashflow problems.

The formula that has worked for us is to bargain hard for a property and buy it only if it can be CF+ before tax (or very close) and while being serviced by a P&I loan. It does rely on the numbers but does give us security knowing we're getting automatic equity each year. These properties are out there. You just have to be patient.

Just a few thoughts from my experience.

[Monid]

Totally agree with Kelster, maybe IO as a short term option or till your own house is paid off, but never as a long term strategy, we want to own our investment properties not rent them from the bank!

[Robot]

Interesting topic, a P&I loan is certainly more appealing but I just finished reading "The Complete Guide to Residential Property Investment in New Zealand" and they recommend that someone in my shoes (no property, high income) should go with interest only loans to increase cash flow so I can continue buying. Orion what is your recommendation for someone in my shoes?

[fudosan]

Hi Robot,

If you have high income, that means your debt servicing ability is good. So your focus should be on building up equity, and one way is by paying down the loan using P&I. If you choose, you may also buy negative cashflow properties, say Remuera or Epsom in Auckland, if you can buy at a good discount. As always, a good balance between debt servicing ratio (DSR) and loan to value ratio(LVR) is essential.