P & I or IO, which do you prefer?

[FreezingandHot]

Hi

Was wondering which is best. My bank has just informed me that my
first IP is on a P&I loan. This was meant to be put under an IO as
recommended by my advisors. So I am paying an extra $40.00 per
fornight in payments as a result.

Is this good or bad, I guess not so bad as the loan is slowly getting paid
off but also not so good for my cashflow situation.

Any thoughts.

FH.

[Julian]

Patrick,
Whether it is good or bad is a decision you will have to make. Reducing debt as the market turns downwards is not a bad move. Graeme Fowler advocates it and so do many others, myself included.
Julian

[FreezingandHot]

mmmm!!! You don't make it simple on me Julian, from most people
I talk to on this site and elsewhere, IO is king. I am getting a sore head
with all the mixed messages, but I guess like my home loan the debt
is reducing.

FH.

[Chemill]

As the interest is a tax deductible expense, I try to keep my investments Interest only. The rental profits can then be dumped into your own home where the interest is not tax deductible. This is an attempt to achieve tax efficiency.

Chemill

[Kiwi_Investor]

For me it depends on my personal situation, and what I'm trying to achieve. Currently I'm on P&I, however when wife stops working will change to IO to improve cashflows to assist with a future purchase.
From the pure property investment point of view I believe IO is the king, and the Cap Gains is your Queen (or cream as some put it).
Either way one should be wary of overcomitting.
Yes the Int is a deduction, but any gains you make from +CF property is income which is taxed of course !!
FH, you could ask your bank to review and investigate a change to IO finance if you want to improve cashflows.

[RentMaster]

Hi

If you have a mortgage on your own home, then paying that off would be a priority. So making your investment mortgage IO and paying extra money on your own personal mortgage might be a good idea. Because your own home mortgage is not tax deductible.

Otherwise, if you can afford to pay P&I then I would be doing that. It saves interest long term because you are reducing the debt. It also creates a safer environment because over time you owe less money.

[Julian]

Chemill,

As the interest is a tax deductible expense, I try to keep my investments Interest only. The rental profits can then be dumped into your own home where the interest is not tax deductible. This is an attempt to achieve tax efficiency.

Good point, if you have a PPOR, and if it has debt, and if you stick to the plan rather than upping your standard of living.

The temptation of spare cash can be hard to resist, wheras the forced savings of P&I loans is less likely to be tampered with for frivolous purchases.

But agree that it is more efficient to repay personal, non deductable debt first.

Julian

[Dean@Massiveaction]

To reiterate every one else, interest only if you have any debt on your own home! Principal on an IP is not t ax deductible and in your situation you will run out of borrowing ability faster if you're on P and I. I would refinance your first property ASAP if I were you

[muppet]

Hi FH

23% of my loans are IO
76% are P&I

13% are floating and
87% fixed.

And that is just the way things have panned out.

Regards

[whitt]

The famous IO Vs P&I debate is back. Everybody has there own situation and both do have benefits when compared to the other. Obviously you need to work out what is more suitable.
IO can allow you to accumulate more property quicker and Pay down debt on PPOR but P&I can allow you to reduce debt slowly when the market is flat.

[Dean@Massiveaction]

I'm definitely a dyed in the wool IO man. Why pay off principal when there's more properties to buy. I'm starting to plan how to own a whole street. Then you have some good control over making it a good rental area!!!

[whitt]

I'm definitely a dyed in the wool IO man. Why pay off principal when there's more properties to buy. I'm starting to plan how to own a whole street. Then you have some good control over making it a good rental area!!!

I once knew a guy whose family had several properties in one street in Melbourne. Then the property boom kicked in and they had control of most a street.

[fudosan]

The other option is IO plus revolving credit facility so you can pay down the mortgage but use it again when you need to.

[Dean@Massiveaction]

Reminds me of a Brad Sugars story where he bought every property for sale in a town. Lack of supply and planty of demand caused a mini boom and he cleaned up!

[FreezingandHot]

Hi All

Thanks for the replys. I understand fully the different strategies you all use. As I have
a PPOR and pay a mortgage it may pay for me to go on IO, but saying that by doing
this I free up $20.00 a week only. And this money would need to be used to pay insur
and rates on the investment anyway. As my student loan finishes in the next 2 months,
it will free up $60.00 a week from my wages which can go towards paying down my
own mortgage.

So I think if times get tuff in the future I still have the ability to go IO, so at present
I think I can survive this P & I structure, I will however need to get my next IP on IO
as I want this to give me a cashflow +ve return so this will be structure to do so.

Thanks for all the great advice, everyones situation is different and what works for one
does not always work for the other.

On another note, I would just like to let you all know that I made an offer on a property
yesterday, a 3 bdrm house in a nice part of town, house was in a good condition.
I faxed an offer to the agent on the house $120,000 below listed price, he called back
and totally refused to even present the offer and said vendor would just tear this up.
What I would like to know, is it worth me dealing with this agent or is my offer just so
rediculous and should not have wasted his time. The first agent I dealt with presented
my below list price offer no problem. This agent did not seem to want to know.

This does not bother me in the slightest, another deal will be around the corner, I just
wonder if I need to look for the right agents who are willing to at least try for a sale.

FH.