Loan Repayments

[Rohb]

IS there any advantage having your loan Term for longer periods,Paying less repayment now and building cash flow.So when you reached your end of fixed term you pay it on what you saved.Do you get penalised for it? Lets say 25year term laon period (pay the minimum) Fixed it (3years) after the 3years anything you saved is payed to get rid of some principal so the next fixed term you set,the loan principal is less.....Iam hopeless in math.I usually just get the bank manager work this out for me.

[Monkeyboy]

Maybe not

Hi Rohb

Here's my calculations
I used 8% and 30yr loan

$100,000 P & I
Repayments @ 8% $733pm
after 3 years $2636 paid off principal

I/O Loan $666pm (thats scary)
Saving $67pm over 3yrs $2412

Next 3yrs still at 8% $733pm
after another 3yrs $6068 off principal
Balance $93,932

I/O Loan $97,588
repayment $650pm saving $2988 paying off principal
Balance $94,600

It would seem that this wont work out beneficial in the long run. The distance between the 2 is only increasing.
If anyone wants to challenge these figures, please do as I may not be fully accurate. Thanks for giving me the opportunity to do this calculation.

[KLOUD9]

Think about it!

Serious investors use any positive cashflow to pay off NON TAX DEDUCTABLE DEBT FIRST! If you pay down your investment mortgage, you are reducing your tax deductability over time.

Interest Only is the best basis as along as you use the surplus casflow to pay off other debt like above.

[spurner]

Go Io

IMO IO is definately the way to go, you will have better cashflow to spend on other property or yourself, and you can enjoy that money now.

The money you borrow from the bank will be amongst the cheapest money you ever get loaned in your life. Rather than pay it back try and re-invest it to create more money, such as building a garage, doing renovations and painting to increase value and rent, or saving that money for a deposit on another property.

The money you repay will pale in significance to the capital gains you will be receiving in the future, if you have bought averagely or better.

[Monkeyboy]

With you all the way there spurner. I was only doing the calculations, which only served to remind me that especially in the first 3 years, the difference saved on IO is much better in my pocket than the banks. Once I have enough properties will I sell and reduce my mortgages. Still a long way off yet.

[spurner]

And very fine calculations they are! P&I is only $15pw more than IO but property values are going up alot more than $15pw! I'm with you: buy twice as many properties, hold for 7-10 years and then sell to repay the balance of debt.

With you all the way there spurner. I was only doing the calculations, which only served to remind me that especially in the first 3 years, the difference saved on IO is much better in my pocket than the banks. Once I have enough properties will I sell and reduce my mortgages. Still a long way off yet.

[casacamo]

Interest Only is the best basis as along as you use the surplus casflow to pay off other debt like above.

Our bank is telling us that we can only do IO for a limited period (5yrs) and then the loan must revert to P&I at much higher repayments as the 30yr term will now be 25yr. Has anyone else struck this problem, or is it time to refinance thruogh another institution.
I can't believe the bank wants us to go down this track, shouldn't they just be able to restructure the existing loan or create a new one.

[Monkeyboy]

Yes the bank will only want to do IO for 5 years, however they will then renegotiate IO for another term. It really depends on the bank. A simple threat that you will look elsewhere should be enough to convince the lender to keep you at IO. And after 5 years your properties will have increased in value so your LVR levels will give the bank its comfort anyway. Also as a PI you are probably going to have to change your structures, that is, you will have more borrowing and different loans to juggle anyway so you may have to move things around. Your loans should never be static and continually looked at to see if you have the best deal anyway. The more banks you have the better flexibility anyway.

[cube]

In monkeyboy's example, IO is the way to go to maximise cashflow, but its what you do with the $67 per month that matters.

If you use it to fill up your car with gas (OK 1/2 full), then you'd be better off paying of the mortgage. However, if you use it to invest in something growing faster than your interest rate (e.g. shares in an oil company), then you are getting ahead.

cube

[TWT]

I like the Pyramid purchasing concept described by Michael Yardney in his new book "how to build a million dollar portfolio - in your spare time"

http://www.propertyupdate.com.au/pages/Book

(although this concept is not new to me ... I like the way he describes and supports it + he has over 300 million in assets and has been through 3 complete cycles!)

Using your properties (well positioned and in above average growth areas that you can add value to) to purchase the next using (LOC's) and eventually then accessing your annual goal ammount out of the equity tax free as it is a loan and not classed as income... meanwhile your LVR and thus servicability is going up every year by your compounding property portfolio capital gains funding your retirement.