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I/O loan vs P&I question for a newbie

Discussion in 'Real Estate' started by mm, 7th Oct, 2009.

  1. mm

    mm New Member

    Joined:
    7th Oct, 2009
    Posts:
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    Location:
    sydney
    Hi all,

    Sorry if some of these questions seem silly, i'm still relatively new to property scene. (i know i still have alot more research to do too!)

    I still live at home, most likely going to rent soon. I don't have any debt and have about 20k savings and want to start making plans for the future.
    I have found a townhouse up north very close to the beach for sale (low 200's)that i'm interested in. It currently has a 6 month tenant in it. The idea would be to purchase it and after the 6 month lease is up to live in it for 6 months to take advantage of the FHOG and the concessions with stamp duty etc, then rent it out again.

    I'm aware that most people buy an IP with the plan to sell it after so many years, but i'm wanting to keep this place for a holiday, retirement kind of thing along way down the track as I really like the area, surrounding suburbs and the proximity to the beach.

    Everything thing i have read suggests that an interest only loan is the best for an IP, but due to the fact that i aim to keep it, I think an P&I makes more sense at this stage as it will be debt free in 25 or so years that way. Just wondering if you agree or not???

    For what its worth, the rent would not cover the monthly repayments. But even with no rent, i would still be making larger repayments than required for the first few years.

    The other option is to look at cheaper unit around Auburn sort of area where it is more likely to set up a loan where the rent meets the repayments. At this stage i like the first option, as I actually want the place to live in at some stage, not just rent it out. I know it comes down to what i want of course, but i was just seeking some opinions

    Sorry if that was really long winded

    Thanks for your time/thoughts
     
  2. jrc77

    jrc77 Well-Known Member

    Joined:
    26th May, 2008
    Posts:
    147
    I suggest you look at setting it up with a interest only loan with an offset account. Put any extra repayments you can into the offset account.

    This will reduce the amount of interest you pay on the loan in the short term, but allow you to withdraw the money from the offset account to be used for a future PPOR purchase.

    Make sure that you understand the tax implications of an offset account vs redraw facility before getting your place - there are a lot of threads about it on here. Setting it up wrong can be very costly (trust me - I did it myself!).

    Regards,

    Jason
     
  3. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Location:
    Sydney, Australia
    I agree with jrc77 - IO loan with offset account gives you the most flexibility and potential tax benefits and achieves largely the same result as a P&I loan.

    However, it does require some discipline to make it work as effectively as P&I - you need to be putting aside the money yourself (the bank won't take it off you like in P&I), and you need to have the willpower to leave it there ... cash sitting in a bank account can be too tempting for some people and they will just spend it. If you think you can resist the urge, then an offset account can work really well in my opinion.
     
  4. Chris C

    Chris C Well-Known Member

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    Location:
    Brisbane, QLD
    I third the motion.

    I recommend just getting your pay put straight into your offest account, and if you can cost effectively manage it, live off your credit card and just pay off your credit card before the interest free period expires.

    That's what I do, seems to work well, except for...

    Note to self, find out where to buy some of this "willpower" Sim speaks of...

    :rolleyes:

    Also as a side note, I'm not sure (I'm out of touch with my property laws) but I thought you had to live in your first home for 12 months to take advantage of the stamp duty concession... have they changed them?
     
  5. Smartypants

    Smartypants Well-Known Member

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    Location:
    NSW
    Pretty sure the ruling is that you must live in the property for 6 months within the first 12 months of purchase.
     
  6. jrc77

    jrc77 Well-Known Member

    Joined:
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    Posts:
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    Stamp duty is a state tax ... so rules are state dependent. In NSW:

    at least one eligible purchaser must occupy the home as their principal place of residence for a continuous period of six months, commencing within 12 months of completion of the agreement.

    Regards,

    Jason
     
  7. mm

    mm New Member

    Joined:
    7th Oct, 2009
    Posts:
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    Location:
    sydney
    Thanks for all your replies. I will look into an offset account and get reading on them

    cheers.