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First Home as I/O with LVR 90% & offset... right or wrong?

Discussion in 'Real Estate' started by 8504054, 30th Mar, 2011.

  1. 8504054

    8504054 New Member

    30th Mar, 2011
    Perth, WA
    Hey guys, I've read a whole heap of posts surrounding this but Im still finding my situation a little ambiguous. I'm in the process of buying my first PPOR with the mindset of buying subsequent IP's within say 5yrs. Inlcuding FHOG I have a deposit of 52K and I am looking at a property of 339K.

    Without researching I was planning to do what most do and that is to save a deposit, create a P&I loan and put 100% of my deposit down...

    I have been given the advice to set up a IO loan with 100% offset (for 180p.a), make my LVR 90% & put the minimum deposit down, once established put the remainder back into the offset along with any further cash (ie pay rises etc)

    I understand the offset and am happy with the concept, however what does changing the LVR to 90% do and how would that benefit me as opposed to going down the old P&I with maximum deposit road??? (his mindset is to use as little of my money and as much of the banks money as possible)

    -Is this the done thing for those who wish to purchase IP's shortly after???
    and how better off will I be in 5yrs time going IO then P&I?

    Thanks in advance! - First time poster, long time reader hehe
  2. builder2818

    builder2818 Well-Known Member

    31st Dec, 2008
    If you have a PnI loan all your funds will be tied up in the deposit of your own PPOR unless you decide to pay less for your deposit so you can save more for an IP. You are then forced to make principal and interest payments month in month out but having an IO loan with an offset account will allow you to make the interest payments but also depositing money into the offset which is reducing the amount of interest you pay.

    By paying only a minimal deposit and leaving funds in your offset will make it easier to get access to these funds when you require a deposit for your IP. Having an LVR of 90% will only mean you need to pay lenders mortgage insurance but you don't need to pay this in one go - it gets factored into the loan and paid off over a few years.

    Having a IO loan for your PPOR also allows you use that property as an IP down the track if you choose and it is already structured the right way so you could put that property on the rental market and with the build up of funds in your offset account you are free to withdraw these for your next purchase/investment.

    With interest only, if you can receive the same rental yield as the interest rate you're paying or even better, the property will be cash flow positive. When you are at this stage you will know how much money you need to keep in your offset account to balance the investments you have.

    Whoever is giving you the advice is giving you the right one.
  3. K_veg

    K_veg Active Member

    24th Jan, 2011
    But is it worth borrowing the extra 10% if you have to pay lenders mortage insurance? I'm in a similar situation. I am buying a $420k investment property, and have enough cash to buy outright, but am planning to take out a loan for 80% and put the borrowings straight into the offset account. That way when I buy a PPOR, I can withdraw the borrowed money to use as a deposit on my home.

    It seems crazy to pay $1000's in LMI to get the extra 10% when I've got the money sitting in my bank account already. Is it worth it though, to allow tax deductibility of this money in the future?

    Not sure what everyone thinks?